Eurozone will survive current crisis and currently offers the chance to buy into high quality companies, according to Schroders

Written by Ray Clancy

Wednesday, 14 July 2010 09:07

Concerns over the future of the eurozone are creating opportunities for investors who may benefit from buying high quality companies that have been dragged down, it is claimed.

According to Rory Bateman, head of European Institutional Portfolios at Schroders, there are opportunities in Spain, Portugal and Italy as European markets struggle to find direction.

‘It is now time to begin taking advantage of this crisis of confidence in the eurozone by selectively buying high quality, growth companies that have been dragged down indiscriminately. As investors flee any companies associated with the peripheral European countries, we see opportunities in Spain, Portugal and Italy,’ he explained.

‘Greece is in a distressed situation but we believe this is an isolated event and the single currency will survive and broad based selling of eurozone equities has created opportunities to invest in high quality, growth companies at attractive valuations,’ he said.

At the start of the year Schroders anticipated markets would be volatile and fairly directionless after the strong 2009 rally. Now it is more optimistic, primarily because negative sentiment of global investors towards the eurozone seems to be at extremely high levels.

‘It is time to have a reality check in an attempt to exploit those fears. It is now commonplace to hear that the euro is under threat and could be broken up as an inevitable Greek default further undermines confidence, contagion ensues and Spain, Portugal, Italy follow suit. Furthermore, credit market seizure prevents eurozone banks from funding their businesses and so on,’ said Bateman.

‘In simple terms, it is our contention that the setting up of a €750 billion rescue package by the ECB and IMF is designed to prevent another Lehman’s type event. The ECB’s effectiveness in preventing another major credit crunch or significant deleveraging of the banking system is difficult to predict, but the magnitude and decisiveness in establishing the fund is a good starting point,’ he explained.

‘From an economic perspective, we do not view the situation as being particularly bad. In addition, we believe it is highly improbable that the euro will face a political crisis which is exactly what is required to envisage a euro break-up. There will be economic adjustments made through fiscal austerity packages and private sector deleveraging, but we expect monetary policy to remain extremely accommodative. The severity of any slowdown from here will depend on the ability of policy makers to effectively manage the deleveraging requirement using monetary stimuli to prevent a double dip scenario. We feel it’s likely the world has learned something over the last three years or perhaps over the last 20 years from the Japanese experience,’ he continued.

Bateman points out that outside of Europe, the economic recovery is actually pretty much on track, China continues to expand, the rest of emerging Asia and Latin America have developing economies without debt issues and not least the USA is on track to deliver 3% growth this year. Recently the IMF upgraded their global GDP forecast from 4.2% to 4.6%.

‘There is undoubtedly a crisis of confidence in Europe from within and externally which has had the effect of depreciating the euro exchange rate which in itself will significantly benefit eurozone exporters. There are increasing opportunities to buy competitive multi-national companies with exposure to global markets on much lower valuations than in other regions. The euro countries cannot rely on exports alone, but we believe with sensible policy decisions, Europe can emerge from this period stronger and more resilient,’ he said.

‘From a valuation perspective, in absolute terms European equities have rarely looked so attractive. Government bond yields are near historic lows with equities yielding more than safe haven fixed income securities such as German bunds and US treasuries. European
companies are expected to deliver 16% earnings growth in 2010 and possibly more in 2011 as European banks earnings recover,’ he concluded.