Is the European economy stable enough to justify a move back into domestic names as a play on the recovery or are equities with international exposure still necessary to balance risk and access growth?
The most recent data from analyst Markit shows that manufacturing activity in the eurozone grew for the first time in two years during the month of July, adding to evidence of economic recovery on the continent.
Hargreaves Lansdown senior investment officer Adrian Lowcock points out that while Markit’s research also indicated that France, Spain and Italy’s economies continued to shrink, each showed bright spots.
The services sector moved closer to stabilisation in Spain and strong results were seen in Italy during July, says Lowcock, while France’s output also reached a 17-month high.
Confidence in European equities has returned in 2013, according to Lowcock, with European markets proving one of the best performing regions over the past 12 months.
The FTSE Europe Ex UK index has returned 36.03 per cent ahead of 16.55 per cent from the FTSE All Share. However Europe remains behind global markets, where it has been since the financial crisis.
The European Commission’s economic sentiment indicator saw an increase for the third consecutive month during July rising by 1.2 points in the eurozone and 2.4 points for the EU.
Importantly the ESI shows signs of improvement for the European consumer, with the uptick in the consumer confidence in the euro area “improving markedly” for the eighth consective month.
BNY Mellon chief economist Richard Hoey believes that the economic decline in Europe has “ended” and expects the region can now return to growth, albeit at a “slow pace.”
Some European equity managers are returning to Europe’s domestic names as a play on the early recovery. However others argue that European stocks with international exposure continue to offer the best opportunities.
Lowcock looks to Europe’s global brands that are able to get the best of both worlds from improvements in both the domestic and international economies, while the European recovery attempts to stabilise.
He says: “With the banking system still heavily indebted any recovery in Europe is likely to be slow and there will be some bumps along the road. A sustained recovery will need growth to return across the region, not just in Germany.
“However investors shouldn’t ignore the region, there is a difference between the health of the economy and stockmarkets. Investors in Europe are able to access strong global brands which are financially robust and in a position to benefit from growth anywhere in the world as well as at home.”
Barclays chief investment officer for Europe Kevin Gardiner views the signs that the recovery is building in Europe as an opportunity to increase exposure to domestically focused areas of the market.
He says: “The eurozone and UK economies have been surprisingly positively of late. Last week’s business survey data has added weight to the view that the region is beginning to show signs of economic life.
“We, therefore, retain the view that investors should be increasing their exposure to the domestically focused areas of the market.”
At the same time, Gardiner acknowledges the risk that the economic recovery in Europe will not ”bear fruit” and recommends domestic names be balanced with stocks that are less reliant on the economic cycle.
Gardiner looks to the “tailwind” from emerging markets exposure offered by world leading manufacturer of prescription frames and sunglasses, Luxottica, as an example.
He says: “Emerging markets exposure is a strong tailwind for Luxottica, not just in terms of the number of consumers, but also the potential for the growing middle class to move up to higher priced brands.”
However Gardiner adds that domestic European economy is also “material contributor” to Luxottica, while the US accounts for the majority of revenues.
He says: “Luxottica recorded growth of 14 per cent year on year in Europe – including 11 pe growth in the Mediterranean.”
Scottish Widows Investment Partnersip European fund manager Catie Wearmouth describes her portfolio as “very international”, with some emphasis on emerging market growth.
The £72.9m Swip European fund has feautured a number of consumer discretionary names with significant emerging market exposure for some time now, including Nestle, BMW and Swatch Group, says Wearmouth.
More recently the manager has bought into value stories that are also able to tap into the global recovery, particularly through their exposure to the US.
She says: “Volvo and Randstad are two companies we have bought recently that fall into the value segment. This is where I am more positioned for a global recovery that will help lift Europe.”
“When I think of Volvo I don’t really think of it as European. Essentially it has significant exposure to North America, Brazil and construction out in China.”
Staffing company Randstad does have domestic exposure to Holland and France in particular, but it was the company’s high component of US sales that proved attractive, says Wearmouth.
She adds: “We took the view a couple of months back that we wanted a cyclical staffing-type company that would recover as soon as the US showed some really concrete signs of recovery.”