A new day is dawning in Europe: "Outlook for European stocks inspires confidence"

Thursday, 11. June 2015 08:47

Bellevue Asset Management / A new day is dawning in Europe: "Outlook for European stocks inspires confidence" . Processed and transmitted by NASDAQ OMX Corporate Solutions. The issuer is solely responsible for the content of this announcement.

Market commentary as at June 11, 2015

Europe's economy is shifting into a higher gear. Improving economic momentum in Spain and Italy is particularly encouraging. Family-owned companies stand to benefit from this trend in two ways: on the stock market and in the real economy.

Advertising slots offered by the Spanish television broadcaster Mediaset España are fully booked again and prices for TV commercials are on the rise. Increased spending on advertising by Spanish companies bolsters confidence that consumer spending will likewise trend higher going forward. There are many signs that an economic recovery is under way in Europe. Growing optimism is a boon for southern Europe in particular, where the recession was especially severe. "Growing momentum is evident on many fronts," says Birgitte Olsen, Lead Portfolio Manager of the Entrepreneur funds at Bellevue Asset Management. Family-owned businesses stand to benefit from the ongoing trend.

Consumption a crucial piece of the picture

Consumers are at the center of this development. An increase in consumer spending should lift economic growth and the prospects of precisely that happening are looking good. Over the past twelve months the rate of unemployment in Spain has fallen from 27.4% to 22%, which is faster than in any other period during the past seven years. The picture looks similar in Italy. Having a job not only boosts a household's real income, it also has positive repercussions for confidence in general. "Consumer confidence is recovering from a low level but it's recovering fast," says Olsen. Consumers are ready to purchase more again.

That is becoming obvious at Marr, an Italian family-owned company that is the country's number one food services supplier, delivering food products to 38 000 customers such as restaurants and hotels. Just-in-time deliveries are on the decline and customers are filling up their storerooms and refrigeration units again. "Italians are going out to eat more and in Italy that's an important confidence indicator," Olsen points out.

The fund manager expects "business investment will also climb on the coat-tails of stronger consumer spending." Car rental agencies such as Hertz or Avis anticipate an increase in business as tourism activity picks up and are already in the process of renewing their car rental fleets. In Spain the average car on the road is nine years old. New car sales have been growing at a 25% clip in 2015.

Framework conditions for business investment have generally improved amid the prolonged crisis. Italy, for example, has passed labor market reforms and scaled back employment protection provisions that had made it almost impossible for many employers to dismiss an employee. Investors who had turned their backs on the country are now returning, attracted by the policy liberalization. Italy's shoemaking industry is starting to move operations back home from low-wage countries. "Made in Italy is viable again," claims Olsen. Reshoring activity is fueling an improvement in the jobs market.

A turning point in the credit cycle

Another positive factor is the improving situation on credit markets. During the crisis family-owned companies did not have as much trouble borrowing capital as their customers did but overall lending activity has finally started to pick up after years of stagnation despite unprecedented central-bank policy interventions. Money supply in the European Union is now expanding at a rate of 10% p.a. "That is a very good pace. The credit cycle is now turning," Olsen says.

Money supply growth is having a direct impact on Prosegur's business. Prosegur is a Spanish family-run business offering security services such as the transport of banknotes. Its deliveries of 500 euro notes to Spanish banks have been increasing, which is a sign of growing revenues for the company and of a recovery in the Iberian property market, where cash payments are not uncommon.

In addition to the positive domestic trends, export activity has also been pointing higher. The current environment is ideal for European exporters. Besides inexpensive commodities and low interest rates, the weak euro or rather the strong US dollar are clearly boosting profits. This advantage will remain in place for the foreseeable future. An end to the euro's weakness is not in sight.

Europe's economic locomotive Germany has a currency that is far too weak considering the healthy state of its economy. If the German economy is doing well, the rest of Europe will do well too.

Cheaper than the USA

European stocks are no longer a bargain after having made good gains but they are not overpriced either. The cyclically adjusted Shiller P/E currently stands at 22, which is slightly more than the historical average multiple (going back to 1980). That is still well below the 30-plus level recorded just before the millennium and in 2007. Compared to the P/E and P/B ratios of their US counterparts, European stocks are trading at a discount of about 25%.

Stock valuations can decline in the wake of lower share prices or higher corporate profits. The outlook for the latter looks particularly promising. Unlike in the USA, where both returns on investment and profit margins are already at very high levels, in Europe there is still considerable potential for improvement. Corporate Europe is a laggard in terms of margins, not only compared to its own historical margins and to the margins currently reported by US companies, but also relative to emerging markets, the UK and Japan. That should soon change though. Profit growth rates already picked up in the first quarter. According to Olsen, "the outlook for European stocks is very good."

Family-run companies stand to benefit more than most from an upswing in economic activity. Olsen: "During the crisis years they trimmed what little corporate fat was left and are now even more lean and efficient." Just a slight uptick in sales will have a very positive impact on earnings. Mediaset España, an owner-managed company, reported a 10% increase in revenues in the first quarter and a 75% jump in EBITDA.

Family-owned companies did not lose any of their innovative drive during the crisis either. They have better-than-average employee retention rates so they do not need to make up for any brain drain. While many competitors made deep cuts in their research and development activities, R&D budgets at family-owned companies were left largely intact at comparatively high levels thanks to their solid balance sheets. Acquisitions of smaller family-run companies and the pools of know-how that came with them were also made. Financing was seldom a problem for entrepreneur-owners during the crisis, unlike for many of their competitors. Given their low levels of debt, their financial independence and solid balance sheets, their loan applications were always welcomed by the banks.

Focus on the small players

Small- and mid-cap stocks are recommended when investing in owner-managed companies. Shares of smaller companies perform best when investor appetite for risk is high, which was not exactly the case last year. Instead, defensive, large-cap stocks topped investors' buy lists in 2014. These so-called teddy bear stocks gave even professional investors a sense of safety and security when economic growth was faltering and bond yields were dropping to record lows. But circumstances have changed in the meantime and small caps should be able to resume their long-term positive trend. Worldwide, large caps gained 46% during the past ten years, mid caps 72% and small caps 83%. The performance of family-owned and run companies stands out even more. The UBS Family-Owned Index, recently introduced in a report by UBS Global Research, advanced an astonishing 345% during the same period.

Whether and to what extent investors in European equities are willing to take on more risk will depend not least on the sentiment around Greece. The possibility of Greece exiting the Eurozone is receiving extensive media coverage but Bellevue expert Birgitte Olsen downplays this simmering crisis: "Greece is no longer expected to have a material impact on the European economy or on stock markets. Greek turmoil will not endanger the European project," says Olsen. 

For further information: 

Bellevue Asset Management AG, Seestrasse 16, 8700 Küsnacht, Switzerland, Tel. +41 44 267 67 00
Tanja Chicherio, tch@bellevue.ch 

b-public AG, Pfingstweidstrasse 6, 8005 Zürich, Switzerland, Tel. +41 79 423 22 28
Thomas Egger, teg@b-public.ch 

Bellevue Asset Management

Bellevue Asset Management is an independent and highly specialized asset management boutique focused on managing equity portfolios for selective sector and regional strategies, particularly in the areas of New Markets, Swiss/European equities and healthcare stocks.

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Source: Bellevue Asset Management via Globenewswire


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Bellevue Asset Management
Seestrasse 16 / P.O. Box Kusnacht/Zurich Switzerland

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