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Experts point to Europe for opportunities

Nicki Bourlioufas  |  13 Jun 2017Text size  Decrease  Increase  |  

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Europe has been in an earnings recession for more than five years, but the most recent reporting season showed the best growth in many years.


Investment experts believe Australian and US stock markets are fully valued and better opportunities to invest in equities exist in Europe, though all markets remain vulnerable to a correction.
Crestone Wealth Management's chief investment officer, David Sokulsky, is recommending clients take a neutral stance on US equities, given full valuations and policy uncertainty around Donald Trump's presidency, and given much of the good news so far has been priced into equities.
But the firm is recommending an overweight position on European equities due to an improved growth outlook, relatively attractive valuations, and an undervalued euro.
"We think the best opportunities for investors lie in markets where economic fundamentals are strong and where earnings are expected to grow, but at realistic levels. Europe has been in an earnings recession for more than five years, but the latest reporting season showed the best earnings growth in many years," said Sokulsky in a May research note.

Platinum's chief investment officer Andrew Clifford is also upbeat on European markets. Despite elections in France and upcoming German elections in September and Italian elections in 2018, the growth outlook is improving.

"With investors focusing on the political risk in Europe, what is not being widely discussed is how the EU's economic recovery is steadily making progress. Between 2008 and 2012, the Eurozone countries lost 5 million jobs. Since 2012, employment has grown strongly with almost 10 million jobs created with another million added in 2016.

"Meanwhile, across Europe, auto sales and property prices are approaching their pre-2008 levels, and there are signs that demand for credit is starting to rise. There is a possibility that better economic conditions in Europe will begin to reduce the anti-EU/anti-euro sentiment," said Clifford.
Bianca Rose, a senior portfolio manager for Morningstar Investment Management, agrees that US markets are expensive, but says European markets have gained in recent times. Instead, she suggests there are pockets of value rather than it being widespread.

"We share the view that US and Australian markets look more expensive than other regions. Our portfolios favour emerging markets, Japan, and select areas within Europe," Rose said.

"While Europe isn't our strongest conviction, there are some select areas such as energy which we like, but some other areas have rallied quite hard over the past year, so some of the relative value has been lost."

Crestone is also cautious on Australian equities given a number of macroeconomic headwinds.

"Australian equities are somewhat fully-priced and the banks are facing a number of major headwinds, which are seeing their earnings growth stagnate. They could also face further issues if the housing market slows," Sokulsky said.

"The retail sector is also vulnerable with international competitors such as Amazon increasing their domestic presence and consumers becoming stressed as debt maintenance becomes an issue."

Going into 2018, Crestone is cautious on the outlook for equity markets given the bull market has run for many years and could pull back due to a confluence of events.

"By the end of the year, we are likely to see two major central banks, the US Federal Reserve and the European Central Bank, effectively tightening monetary policy at the same time. This would provide a new phenomenon and may negatively impact risk assets," Sokulsky said.

"Additionally, if China's growth slows down following the National Congress of the Communist Party and the domestic housing market corrects, then equity values would come under pressure."

Crestone is therefore recommending clients take a more cautious approach to equities and move to a slightly overweight cash position.

"While we believe that now is a time to be prudent and increase cash holdings, we don't advocate large allocations to cash. As nobody knows what the future holds, it's best to adhere to a long-term strategic asset allocation," Sokulsky said.

"When you consider the current global context, economic growth and earnings are positive, but equity values are high. Crestone is relatively neutral at present, but cautious against taking on extra equity risk. As a result, we are recommending our clients hold a little bit extra in cash.

"We are also underweight fixed interest because we think that interest rates will rise over the coming year." 

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Nicki Bourlioufas is a Morningstar contributor. This is a financial news article to be used for non-commercial purposes and is not intended to provide financial advice of any kind. Opinions expressed herein are subject to change without notice and may differ or be contrary to the opinions or recommendations of Morningstar as a result of using different assumptions and criteria.

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