Old World Bargains
Guillaume Rambourg has worked alongside Roger Guy on Gartmore European Investment Trust (London: GEO) since 1995. Of course the first question on everyone’s lips when talking about Europe now is sovereign risk and the debt positions of countries such as Greece, Spain, and Ireland. Budget deficits are bad in other countries as well, including the UK (11.5% of GDP compared with Ireland's 12.5% and Greece's 12.7%), and are almost universally way beyond the Maastricht treaty’s cap of 3%. This is a major issue which has clouded the prospects for the region as a whole, and of course for its currency.
And that’s not all. Europe has the specific problem of a declining working population (around 55% of adults now), leading to the critical question of who is going to pay to service the pensions of the retired workers. Guillaume said that Sweden has already faced this problem, and responded with sharp cuts in public spending. That may be on the cards in Europe, as fast economic growth is not likely to come to the rescue. Guillaume confirms what you would suspect—that all of the fast GDP growth is occurring in emerging markets, and that Europe can only expect sluggish growth at best.
Against that macroeconomic background, why [would] any investor want European exposure? But of course it is companies and profits that matter. Guillaume says that European companies have actually been surprising on the up side and are “in the middle of a big earnings upgrades cycle.” He says companies have “really been coming up with the goods” and believes this trend “should continue for a few more quarters.” European companies, it seems, have been good at cutting costs and capital expenditure, and as a result they are outperforming admittedly modest expectations.
Nor are valuations expensive. Guillaume reckons the average price/earnings ratio for European stocks is around 12.5x now, which he calculates is a 7% discount to the average rating over the past 20 years. Accordingly, he thinks European equities are “a more defensive area to be,” with a decent average dividend yield of 3.6% to 3.7% and expected earnings growth of 15% to 25% in 2010. Guillaume notes that the yields on equities look markedly better than the yields from corporate bonds, making equities “a better place to be.”
As examples of the companies he likes, Guillaume mentioned Renault (Paris: RNO), largely because of its stake in Nissan; and Nestlé (Zurich: NESN), which still grew, even in 2009. He says the company is a good cash generator and expects a share buyback. Gartmore European is generally overweight financials and exporters, and underweight in technology and utilities.
For us, though, Gartmore European is has lagged its peer group over recent periods, and is not cheap on a discount of 5.9%. We feel there may be better choices elsewhere in the sector if you want European diversification.