There are great deals for stock pickers in the Eurozone.
That’s because downside risk is falling in the region, says Nick Langley, investment director and senior portfolio manager of RARE Infrastructure in Sydney, Australia.
His firm manages the Renaissance Global Infrastructure Fund, and co-manages the Renaissance Optimal Global Equity Portfolio, Optimal Income Portfolio and Optimal Inflation Opportunities Portfolio.
As tail risk has fallen, equity markets have bounced, Langley adds.
He expects political leaders, the ECB and other supranational Eurozone institutions to “do just enough to keep the Eurozone together.” Even if Greece exits, its ousting shouldn’t affect the region as a whole.
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Instead, the zone’s primary task is to iron out imbalances between the different economies. This, Langley says, will take years to accomplish. So he expects GDP growth to be below average for at least the next decade.
“When we plug that into our financial models, and model all of these companies on a bottom-up basis, the infrastructure-style companies look less attractive, and utilities look a little bit more attractive,” he says.
When you factor in sovereign risk, however, some companies look much better than others.
“Governments are trying to find ways to reduce spending and raise taxes, and a number of those programs are impacting the utility companies and other corporates,” Langley explains. “We need to be careful of which companies we choose and in which areas.”
France has hiked corporate taxes and reduced the deductibility of interest charges in tax calculation, for example, which has increased the effective tax rate.
“There are a number of quite thorny issues in Europe,” he adds.
Overall, current conditions in the Eurozone are ripe for the bottom-up stock picker.
Langley concludes, “It’s an interesting market in that most people are focused on the big-picture macroeconomic issues. However, if you take the stance that Europe will remain as essentially one bloc, it actually is very much a stock picker’s market.
“Companies, industries and sectors are going to perform quite differently under those long-term economic conditions.”