Investors Return to Europe as Forgotten Continent Shines
Until recently, investors might have been forgiven for shunning European equities. But the past few months have seen the outlook brighten, forcing many to rethink their allocations. Political risks are receding, consumer confidence is back and manufacturers – not withstanding some Brexit-related concerns – are voicing optimism about exports. Add to this some attractive valuations and the potential for pro-growth reform agendas in France and elsewhere, and Europe looks poised to outperform the US says Dean Tenerelli, portfolio manager of the T. Rowe Price Funds OEIC – Continental European Equity Fund.
‘European performance is reflecting these positive developments,’ Tenerelli notes. ‘After continued disappointment for several years, European earnings still remain appreciably below the level achieved a decade ago. Key factors have been sluggish economic growth both within Europe but also more broadly a collapse in commodity prices and the structural erosion of financials’ earnings.’
Tenerelli says many of these headwinds have become tailwinds, and European earnings should comfortably advance at a double digit clip this year. Despite this improving environment, however, Tenerelli is quick to underline the importance of being selective and employing a bottom-up framework.
‘Fundamental, stock-specific research is important to identifying opportunities in today’s markets,’ he says. ‘Applying an intense focus on meetings with companies and seeking to understand which might be able to generate attractive long-term future returns is key,’ he adds. ‘You really need to look beyond where the current market consensus is concentrated.’
One sector that has been overlooked by many investors is telecoms. Although the industry continues to face headwinds such as regulation and competition, Tenerelli has found interesting investment cases in several countries, including the UK, Germany and Sweden, such that it is the fund’s largest overweight at the end of June.
‘We believe valuations do not reflect improving industry fundamentals,’ Tenerelli says. ‘Entities with strong local market positions and well-invested networks are benefitting from the consumers’ exploding appetite for data and the convergence between telephony (mobile and fixed), broadband and broadcasting.’
Meanwhile, European financials are the largest sector allocation in the fund, at a little over 20% of the fund to the end of June this year. Higher interest rates are widely expected at some point and will improve the headline profitability of banks, some of which are still trading at attractive valuations. What’s more, US credit growth has slowed notably in recent months, while Eurozone bank lending is ramping up.
Tenerelli adds that certain markets are likely to see further consolidation, which should aid the pricing environment. ‘In Italy, bank restructuring is underway. But we continue to be very focused on those companies with strong levels of capital, good returns and that are trading at attractive valuations,’ he says.
The veteran fund manager has a preference for lenders that he believes are solid, liquid and well-managed, with France’s BNP Paribas, Nordea bank – the largest financial services provider in the Nordic region – and Dutch bank ABN Amro all stalwarts of the fund. Tenerelli also recently added Spain’s CaixaBank, which he considers a well-managed bank with a strong and growing market share, especially in Catalonia.
As investors’ moods have swung more optimistically, certain corners of the market – especially cyclicals – are offering fewer attractions at the headline level, Tenerelli says. However, even here there are any number of stock-specific stories. ‘Investors may be overlooking the potential where a company may be adjusting its business model, or where we have identified that its end-markets are likely to develop differently to how the consensus currently expects.’
‘For example, we have invested in the Spanish company Cellnex, which is establishing a leading position in the management of mobile towers, with the potential that we believe is not appreciated by the market.’
Tenerelli remains committed to his approach, with a strong focus on good returns and valuation when looking across the broad European landscape. ‘Looking across the style and market capitalisation spectrums, I continue to be heartened by the opportunities we can identify in Europe.’
This bottom-up, sometimes contrarian framework continues to serve Tenerelli well. Year-to-date, the fund has returned 15.58% versus 12.73% for the FTSE All World Developed Europe ex-UK Index1. The firm’s longer running T. Rowe Price Funds SICAV – Continental European Equity Fund, also managed by Tenerelli, has beaten the same index over five years, generating an annualised return of 14.93% versus 13.92% for the index2.
1Data shown is net of fees in GBP terms to 30 June 2017. Inception date 26 September 2016.
2Data shown is for the I share class, net of fees in EUR terms to 30 June 2017.
Past performance is not a reliable indicator of future performance.
Fund performance is calculated using the official NAV with dividends reinvested, if any. The value of the investment will vary and is not guaranteed. It will be affected by changes in the exchange rate between the base currency of the fund and the subscription currency, if different. Sales charges, taxes and other locally applied costs have not been deducted and if applicable, they will reduce the performance figures