07.28.2015

Managers optimistic on Europe 

07.28.2015
Shanny Basar

Fund managers at T Rowe Price said Europe offers the best opportunity for an earnings acceleration in the second half of this year.

Chris Alderson, head of international equity and John Linehan, portfolio manager at T Rowe Price, said in a report that economic growth forecasts in the eurozone have begun to pick up in core countries, such as Germany and France, and in most of the peripheral debtor countries except Greece.

T Rowe Price said: “The profits recovery would also appear to have further room to run in Europe than in most global regions.”

In addition, operating leverage is relatively high for many European large-cap companies, so a modest revenue growth can translate into sizeable earnings gains.

“All this suggests that if the European recovery normalizes, it could have a potent effect on earnings,” added T Rowe Price. “Meanwhile, aggressive quantitative easing by the European Central Bank is providing direct support for asset prices.”

Nicola Mai, sovereign credit analyst at Pimco, said in a blog that although the eurozone’s composite Purchasing Managers Index fell in July, it still remains consistent with above-trend growth of 1.5% to 2% in annualized terms. Mai gave four reasons for above-trend growth in the region – the improvement in fiscal conditions, the European Central Bank’s quantitative easing program improving credit conditions, a weaker euro and lower oil prices.

“Italian and Spanish government bond spreads to German Bunds have room to compress further from the current level of around 120 basis points, partly on the back of continued asset purchases by the ECB, which we think will continue until September 2016 at least,” added Mai. “Corporate credit is not cheap in absolute terms, but we think the asset class should offer attractive returns in the current environment of good growth and significant policy support.”

Mai said that banks offer interesting opportunities and that European equities should also perform well ahead of a good earnings season.

Ed Perks, chief investment officer of Franklin Equity Group, said in a report that despite the recent uncertainties surrounding Greece, the firm remains fairly confident about Europe’s economic prospects.

Perks said: “We have holdings in European equities in sectors such as health care and energy, and we think the current volatility in the European markets presents an opportunity to take advantage of relative value between European companies and their US-based peers. In fact, we have initiated purchases of many of our foreign holdings during similar market dislocations.”

At Loomis Sayles, Rick Harrell, senior sovereign analyst said in a report that Europe seems to be pulling itself out of disinflationary quicksand, and certain leading indicators are consistent with better growth outcomes.

“The ECB’s commitment to quantitative easing, a significantly weaker euro, lower energy costs and positive credit growth have helped lift the region’s growth outlook,” Harrell added.

Featured image via iStock

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