Old World Bargains


Andrew McHattie Image Andrew McHattie Editor, Investment Trust Newsletter
Though Europe may be doomed to slow growth, its stocks are cheap, a trust manager tells Andrew McHattie of the Investment Trust Newsletter.

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.