Invesco: Europe is a no-brainer in the long-run
Fund manager Stephanie Butcher says that when Robert Peston is regularly on the news it is a sign that valuations are low and buying opportunities are abundant.
By Mark Smith, Senior Reporter, FE Trustnet
Tuesday June 26, 2012
The turmoil in the eurozone has made Europe the cheapest market available to investors, says Invesco’s Stephanie Butcher
The manager of the £52.7m Invesco Perpetual European Equity Income
fund says investors have never been more pessimistic about the European economy and anyone with a long enough time horizon should see the current situation as a fantastic chance to pick up bargains.
"As soon as we see [BBC business editor] Robert Peston on the news regularly we know we are in trouble," she said.
"We are at a point now where sentiment is becoming extreme. There are some companies that are being sold down aggressively and at the sector level as well."
Major European stock market indices have suffered terribly, with investors lacking any confidence in European politicians finding a solution to the debt crisis.
Data from FE Analytics
shows that the German Dax is down 15 per cent since the sell-off began in March while the Spanish Ibex index is down 23 per cent.
Performance of indices year-to-date
Source: FE Analytics
Last week, Investec's multi-asset manager Max King said that European stocks represented the buying opportunity of a generation
Butcher says that the sell-off has been indiscriminate, with investors looking to scale back their exposure to risky assets in favour of more defensive names. This means many European equities are being marked down unfairly.
"Investors are net underweight Europe. This is a very unloved market," she explained.
"However, the Dax and Ibex have only around 30 per cent of their index exposed domestically. This is leaving a huge portion of the index where we can get access to companies with international exposure at very attractive valuations."
She added: "Valuation is the key discipline – it seems obvious to be in safe, defensive stocks, but it’s important to recognise what you are paying for that."
"From the macro point of view, European GDP is going to remain very low for a long time, but it comes down to valuation. An Armageddon scenario is being baked into the price for Europe and that is not the case for the rest of the world."
According to Butcher, this means that investors can get access to global businesses at European prices simply because they happen to be domiciled in countries such as Spain and Italy.
"We are buying international businesses. A good example is Indotech – it is based in Spain but it has consistently outperformed its global peers in the sector. In aggregate, Europe has rarely been cheaper while other markets are in their normal valuation range."
"Repsol is another company we like. It has been hit because it is Spanish-based and also because of the Argentinean expropriation of subsidiary SPF but we think it offers a tremendous growth and income opportunity. It has the fastest oil production growth out there and a yield of 6.7 per cent."
FE data shows that
Invesco Perpetual European Equity Income
is less volatile than the average fund in IMA Europe ex UK. Its headline yield of 5.13 per cent is also highly attractive.
Sceptics are likely to argue that if the euro collapses then even multinationals such as Indotech and Repsol are likely to struggle in a decimated domestic economy.
In response to these criticisms Butcher commented: "If your view is that Europe will fall apart then you are better off out of equities and in cash but our view is that the project will survive."
"The market has been hugely de-rated but there are lots of very high quality, internationally exposed dividend payers that look cheap."
The fund manager admits that the threat of companies slashing their dividends could put some pressure on the sector. However, she remains fairly optimistic.
"Dividend strategies have underperformed because people are concerned about dividend cuts. Financials and telco have seen cuts and there is a bit of risk out there but I think the ones likely to cut would have done so already."
"Dividend payouts are actually pretty robust and it is unusual to see dividends come down a lot. Dividends, over time, are a much more steady-eddy place to be than the market is realising at the moment."