The Eurozone is the UK’s largest trading partner, and the reverse is also true. Despite this, anti-EU sentiment in the UK is on the rise, with the UK Independence Party forecast to take the largest share of the British vote in upcoming European elections. Although only the 20 miles of the English Channel separates the UK from the rest of Europe, the gulf can often seem far greater.
While Britons may still yearn for a year in Provence; they are not so keen for the EU to become involved in their domestic affairs. It can all be very confusing.
For investors trying to determine the fate of European equities it can be similarly baffling.
On the one hand, credit markets appear to be telling us that the worst of the Eurozone crisis is over.
Greece’s successful bond issue in April, raising €3 billion at a cost of just under 5 per cent for five years, was the first time the country had tapped markets since March 2010.
In recent weeks, Spanish 10-year bond yields have even dropped below 3 per cent, the lowest levels seen in decades.
On the other hand, it is hard to be overly optimistic when youth unemployment in countries such as Italy and Spain remains over 40 per cent.
Disappointingly, many Eurozone countries have failed to overhaul sclerotic labour markets – the old maxim that a good crisis should never go to waste has sadly been ignored.
Nevertheless, it does appear that Europe is recovering. Leading indicators of economic growth, such as purchasing managers indices, have been improving and the European Central Bank, for once, is arguably the most dovish of all major central banks.
Although European equity markets have been strong performers during 2014, valuations do not appear unreasonable.
Performance of indices in 2014
Source: FE Analytics
As a consequence, we have been increasing our exposure to Europe both directly and indirectly.
We remain bullish on the European automobile space, where increasing consumer confidence is beginning to feed through into passenger car sales.
BMW, the German automobile manufacturer, is well placed to benefit from this trend. With a strong slate of new models to be launched both this year and next, demand for BMW’s should be buoyant.
With ongoing cost-efficiency programmes also benefiting operating profit margins, we believe that BMW’s current valuation of less than 10x 2014 earnings fails to reflect the improving operating environment or the company’s strong market position.
Even Europe’s beleaguered construction market, which suffered particularly badly during the Eurozone crisis, is beginning to show signs of improvement.
Although this has not been uniform across all European countries, we have noticed a marked increase in confidence amongst the management of company’s exposed to the sector.
Synthomer, the UK-listed chemicals company, generates almost 80 per cent of its operating profit in Europe and manufactures resins and binders used in construction.
Performance of stock vs index over 1yr
Source: FE Analytics
In its most recent update, Synthomer’s management indicated that European volume demand had begun to improve and pricing had strengthened.
Currently trading on a 2014 PE of less than 12x and with an attractive cash-return profile, Synthomer should be a beneficiary of an improving European economy.
The European recovery is fragile. Indeed, many of its citizens would question whether there has truly been any recovery at all.
However, with a central bank that appears to ‘get it’ and confidence slowly returning, companies with exposure to the continent should begin to deliver improved results.
SVM World Equity has been run by Neil Veitch and deputy manager James Cooke since December 2010.
Performance of fund vs sector since manager took charge
Source: FE Analytics
Data from FE Analytics shows it has made 39.55 per cent since then as the average global fund has made 26.74 per cent.
