Positive upward outlook for European markets in 2011

European markets are expected to rise in 2011 as investors, drawn in by attractive valuations and dividend yields, switch from bonds to equities.

‘Whereas, certainly over the last two years we’ve seen a flight away from equities into bonds, we’re starting now to see the reverse of that,’ said Andrew Goodwin, manager of the €13 million SVG European Focus Fund. This is ‘not least because the dividend yield you can get from equities, particularly in Europe, is very attractive,’ he added.

Credit Suisse said in a recent note that bonds outflows were negative for the first time since 2009, with equity inflows at a highest since 2006, while money market inflows have turned positive.

Goodwin said the sell-off in European markets sparked by the eurozone debt crisis, with Ireland following Greece in seeking a bailout this year, has been ‘overdone’, pointing out growth in key parts of Europe remains robust.

Goodwin is primarily focused on a bottom up strategy and holds a number of financials whose third-quarter results, he said, showed strong progress. Dutch bank assurance group ING is the fund’s top holding, mainly on valuation grounds. ‘They’re looking at separating out their assets in terms of insurance and bank and we feel this will really be a catalyst to value realisation,’ he explained.

He likes Swiss bank UBS on the back of value in its private banking franchise, with SVG looking at it on a three to four-year investment horizon. Goodwin said while UBS has been under the cloud of a US tax evasion probe, ‘the franchise ultimately is intact and will repair itself and start to grow again, that has started to happen in the fourth quarter of this year.’

SVG also favours Italy’s UniCredit and French bank Societe Generale, with Goodwin betting on a declining level of provisions over the next three to four years which would drive significant earnings growth.

In the 12 months to the end of November, the fund returned 9.8%, underperforming peers by 4.1%, data from Thomson Reuters fund research firm Lipper showed. The fund holds luxury car maker BMW, which is hitting a ‘real sweet spot’ with new products that are ‘very profitable and will drive return on capital far higher than it’s achieved historically,’ added Goodwin.