European markets worth looking at for long term investment, it is claimed

Written by Ray Clancy

Tuesday, 05 October 2010 09:08

Overlooked European markets could offer sound returns for long term investors, it is claimed.

Faced with the challenge of preserving capital, some investors have begun to drift away from equities over concerns that the market is heading for another downwards adjustment.

But Paras Anand, head of european equities at F&C, believes that shares in the region are being unfairly overlooked amidst a bleak macro outlook.

Two popular current strategies among investors are bonds, particularly low risk government issues and cash. But Anand believes that the margin of safety in government bonds is slim, with yields on German Bunds for example near all time lows.

The prevailing view is nevertheless that bonds are currently preferable to equities on the basis that the perceived risk of inflation is low and that any further easing initiatives would see central banks again stepping in as buyers of government issues. The appeal of holding cash is similar in some ways, in that it reflects a pessimistic view of macroeconomic prospects but additionally reflects concern over the solvency of government balance sheets.

Whilst stock markets around the world have recovered from last March’s low levels, Anand believes that equities, particularly in Europe, may offer sound returns for the long term investor.

‘We accept that there remain material drags on headline economic growth, however the current prices of bonds and cash reflect a negligible probability of any pick up in inflation. This we believe is a precarious position. Wilst recent data on inflation has been dismissed on the basis that it has been driven by the impact of stimulus measures and the short term impact of re-stocking, other pressures such as the inflation in soft commodities and food prices and the impact of rising prices for goods imported from Asia appear more structural,’ he said.

‘Additionally, one of the reasons that we have not seen more inflation is the failure of quantitative easing initiatives to get more money in the hands of those that really matter, that is the consumers. With banks a scale better off than their precarious position of a year ago, the inflationary impact of second round of stimulus may be higher than currently expected,’ he exoplained.

‘Lastly, the majority of developed market governments desperately need some inflation in the system to help combat their current solvency positions. Overall, we find the current benign view of inflationary risks an uncomfortable one,’ he added.

One of the most frequent arguments against a more optimistic position on European shares is the precarious solvency positions of the peripheral countries. Anand’ view here is that whilst the macroeconomic implications of the fiscal consolidation measures being undertaken are negative, ‘there are important positive aspects that are arguably being overlooked’.

He said; ‘We feel that the Euro breaking up would be an outcome that benefits no-one and so the likely results of the broad direction of current policy are a weaker Euro in the near term, benign monetary conditions for the core European economies and much-needed reform of the labour markets. These factors would materially improve the global competitiveness and future growth prospects for European economies and support the development of companies, for whom these factors have been a historic headwind.’

He concludes; ‘We believe there is clear value both in particular areas of the market and in Europe as a whole, particularly among large cap companies. This is where we see the best investment opportunities on a long term basis.’