Sam Cosh, manager, European Assets Trust (EAT): “If you look at European equities as a whole they are not cheap, and certainly not as much as they were, but if profits recover they will make Europe look much better value than now. While their relative value seems okay in terms of absolute value they need to see profits increasing, although there are signs of this happening.
“Financials and resources look cheaper than the rest of the market, and among the former the massive amount of capital restrictions gives niche, well-run businesses an opportunity.
“Italian asset managers are benefiting from growth in long-term savings and taking market share from banks which have traditionally dominated this market. Azimut (It:AZM), along with other large independent asset managers, has experienced massive inflows. The perception is that Italy is poor but many individuals are not. Traditionally they invested in bonds but there has been a move to equities and away from banks. The asset managers can provide advice, distribution and the product.
“Leonteq (SW:LEON) makes structured and yield enhanced products for private individuals. Banks don’t have the systems to compete with this company and it is taking market share off traditional providers of these products.
“But I wouldn’t say these shares look cheap. Non-life insurer Topdanmark (DK:TOP) operates in an oligopolistic market, making money on underwriting. We also like conservative, sensible banks such as Aareal (Ger: ARLX), a German-listed pan-European property lender that no longer has competition from the likes of Royal Bank of Scotland (RBS). Aareal has also not lent irresponsibly.”
With regard to the situation in Greece Mr Cosh expects some short-term market volatility but adds that “maybe we will see opportunities to add to the portfolio from an unnecessary sell-off. Any contagion can be contained – Italy, Spain, Ireland and Portugal have put through structural reforms and we have seen the benefits.”
Sam Morse, manager, Fidelity European Values (FEV): “Although valuations of European stocks appear a bit less exuberant than those in the US I think they are at that stage in the cycle where they are certainly higher than average and perhaps even becoming dangerously high. And that is a challenge: I am struggling with absolute valuations so we have to look to a certain extent to stocks that are relatively attractive given their dividend prospects. We try and choose companies that will be able to deliver consistent dividend growth on a three- to five-year view, and are attractively valued.
“I think there are some good opportunities in financials because this sector is still relatively unloved given various challenges, so we can still find companies that should show very attractive dividend growth from a quite an interesting level of dividend yield.
“A good example is Italian bank Intesa San Paolo (It:ISP), which is conservatively managed and 90 per cent focused on Italy. What is really interesting is an internal turnaround under new management, which is looking to take some costs out and improve overall growth through growth in the asset management business. A lot of Intesa’s business plan revolves more around paying out more in dividends and growing them from an attractive level – the yield’s around 4 per cent for next year and we think that will grow to as much as 7 or 8 per cent in two or three years time.
“Intesa will benefit also from changes in the external environment, in particular the industry structure in Italy, which was dominated for many years by a large number of local mutual banks. There have been some legal changes that are likely to lead to a lot of consolidation, and we think that will improve the profitability of the Italian banking system.
“The Italian economy is also improving. There are no Greek holdings in Fidelity European Values and the direct impact on most of the companies held in the portfolio should be relatively small. But if Greece were to leave the eurozone I think it would have a longer-term impact on equity risk premiums in southern Europe.”
David Reid, co-manager, BlackRock Emerging Europe (BEEP): “As the market started to fall prior to the Greek elections at the beginning of this year for the first time we started to accumulate Greek positions, as valuations had gone down to levels we felt reflected the risks involved. As we’ve gone through the turbulence this year we’ve slowly moved into an overweight position, although it’s not a huge proportion of our trust (Greece accounted for 6.4 per cent of assets at the end of May). But we are optimistic on Greece there is very consistent popular support for staying in the euro.
“However, you have to understand there are risks involved so you can never say it’s a sure thing.”
The trust’s holdings include National Bank of Greece (Gre: ETE), which accounted for 4.5 per cent of assets at the end of May.
Peter Ewins, manager, F&C Global Smaller Companies (FCS)
Global fund F&C Global Smaller Companies is overweight Europe relative to its benchmark, and Mr Ewins does not expect to change his overweight position.
“Our exposure to Greece remains negligible as the outlook for the country remains highly uncertain,” he says. “But it is unlikely to be transformatively bad for the rest of Europe.
“We tend not to make huge swings in asset allocation based on macro events: just because the macro scene is not good doesn’t mean the market can’t do well. And Spain, Italy and Portugal are in a different position to Greece.”
F&C Global Smaller Companies’ holdings in this area include CTT Correios de Portugal (Port: CTT), the Portuguese post office. Mr Ewins says this has a strong balance sheet and a good dividend yield, and should benefit from profit growth as the economy recovers and parcel deliveries grow due to the increase in internet shopping.
Atresmedia (Sp:A3M), a Spanish free to air TV operator, holds a duopolistic position in a market which has gone through significant consolidation in recent years, and should benefit from advertising spend picking up.
Overreactions to the situation in Greece, meanwhile, could cause markets to come down and provide investment opportunities. But he is concerned about outflows from the market as this has been supported by inflows during the past few months.
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