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Telco, emerging countries could see Europe surpass US in 10 years

Dan Kemp  |  22 May 2018Text size  Decrease  Increase  |  
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Paris, France

European equities have trailed their global counterparts 30 per cent since 2015 and closer to 65 per cent since the trough of the financial crisis. Driving this has been a plethora of worries, as it wasn’t that long ago that we were questioning whether the EU could actually fall apart.

Fast-forward to today and European exposure may even seem alluring, with a combination of low prices, strong corporate earnings growth, and some of the best economic conditions in a decade. In fact, Europe ex-UK earnings growth was 18.7 per cent over the 2017 calendar year, far greater than the 3.4 per cent average annual decline in the decade prior. Even dividends increased at a stellar rate, with 2017 recording 3.9 per cent average growth in per-share dividends.

So, the fundamental landscape has seemingly changed. Yet, not all sectors and countries are benefitting, which is where it becomes interesting. Despite being a developed market with strong coverage, arguably making it more efficiently priced,, the continent is still extremely fragmented.

For instance, European telecommunication companies are down 11.7 per cent over the past three years to the end of March 2018, whilst French equities have increased by 22.1 cent. Hence, sector and country dispersion are important levers to pull in their ambition to maximising returns and/or minimising risk. The same goes for size, where small caps have significantly outperformed their large equivalents.

Finding unloved sectors

Bringing this together, the market reality is still incredibly complex. In the long-term – the period most investors should care about – investors need to determine whether they want a broad market-cap weighted exposure, or to select individual opportunities within the European landscape.

Based on the most recent analysis, the biggest opportunities reside within unloved areas such as European telecommunications, eclipsing the more popular areas such as US energy or US financials.

Within Europe, the return expectation is closer to 5.6 per cent a year for European telecommunications versus just 3 per cent for European equities in aggregate - in real local currency terms. These are far in excess of the US equivalents, although US healthcare looks reasonably attractive to us with an expected return of 3.0 per cent and offers an alternative performance driver.

By extension, emerging Europe may also have distinct appeal as it is expected to deliver 4.5 per cent a year and is often disregarded by investors. Part of the reason is that gaining exposure can prove problematic for end-investors, as it is not typically covered in the broad market and makes up less than 15 per cent of emerging markets. The key is not to be afraid to allocate a dedicated position to a country or regional fund, especially when disparity in valuations is apparent.

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Dan Kemp is chief investment officer, EMEA, Morningstar Investment Management.

© 2018 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'class service' have been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. Please refer to our Financial Services Guide (FSG) for more information at www.morningstar.com.au/s/fsg.pdf. Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782 ("ASXO"). The article is current as at date of publication.

 

 

is chief investment officer, Morningstar Investment Management EMEA.

© 2019 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'class service' have been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. Please refer to our Financial Services Guide (FSG) for more information at www.morningstar.com.au/s/fsg.pdf. Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782. The article is current as at date of publication.

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