Business | Markets
European equities offer value despite recent economic shocks
A strengthening dollar and a weakening euro will lead to significant improvement in profit numbers for European exporters selling in dollars
- Financial Times
- Published: 00:00 September 7, 2010
UK investors are often unenthusiastic when it comes to investing in continental European equities, but Barry Norris, manager of the £306 million (Dh1.73 billion) Argonaut European Alpha fund argues this view is misguided.
"Global markets are going through a fundamental change in terms of the rise of the east and the debt troubles of the west and this creates superb opportunities for good stockpickers," he says.
"It annoys me when I read about Europe's ‘downfall' in the media because this isn't the case at all. Europe as an investment right now is compelling."
According to Norris, Europe's exporters, which make up the majority of the index, have suffered as a result of a strong currency for the past decade, with production costs high, relative to competitors outside Europe, and earnings in dollars considerably lower on a purchasing power parity basis.
He suggests that a strengthening dollar and a weakening euro will lead to significant improvement in profit numbers for European exporters selling in dollars, even if sales remain the same.
He cites French aircraft manufacturer Zodiac as one that is already benefiting from this trend. "For every 1 per cent that the euro slides against the dollar, its profits rise 5 per cent. The Argonaut European Alpha fund is heavily weighted to similar companies set to benefit from the stronger dollar against the euro."
Historic lows
Norris points out that the overwhelmingly negative sentiment directed at Europe has resulted in valuations falling to historic lows, with the index currently trading on a multiple of approximately 10 times 2011 earnings, well below the 14.5 times average for the past 30 years.
"This is at a time when all other asset classes, including cash, government bonds, property and corporate bonds, look expensive," he says.
"The premium investors currently receive for holding European equities is, excluding last year, at its highest since the 1970s. With inflation likely to pick up, cash and bonds look even less attractive compared to an allocation to European equities."
The Argonaut European Alpha fund has consistently been one of the top-performing funds in the IMA Europe ex UK sectors since it launched in 2005 with Norris having outperformed in both rising and falling markets.
The recently launched European Absolute Return fund has raised £5 million at launch in February 2009.
Foundation
Norris says the foundation for his investment process was laid during his time as an analyst at Baillie Gifford.
"I learnt to analyse companies there as a member of the UK equity and European desk. Baillie Gifford is one of the few investment companies left that runs a really good training programme, which is so valuable in an industry full of imperfections."
But it was at Neptune that Norris met Oliver Russ, with whom he set up Argonaut Capital Partners in 2005 as a 50/50 joint venture with Ignis Asset Management. The pair share their investment ideas.
"We want to identify those companies with superior earnings potential relative to the market's expectations, that are attractively valued, and that have unrecognised growth potential," says Norris.
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