High valuations for U.S. equities probably has you looking for opportunities elsewhere. So why not look to Europe?
You might be ignoring the region because of its economic and political challenges. But for Alessandro Valentini, “Europe is where we are finding the most compelling opportunities today,” he says.
“European earnings have lagged U.S. earnings by a large amount since the [financial] crisis,” says Valentini, fundamental portfolio manager at Causeway Capital Management in Los Angeles. He acknowledges that “while U.S. companies recovered quickly, European companies suffered again in 2011 because of the periphery crisis, and slower economic growth has kept earnings improvement low.”
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Valentini, whose firm manages the Renaissance Global Markets Fund, expects that to change.
“We’ve seen supportive PMI numbers out of many European countries, [and] we are seeing signs that core inflation is moving up, and, in general, economic data [have been] firmer,” he says. Even more important are signs of capital expenditure recovery.
The result: a narrowing spread between company earnings in the U.S. and those in Europe. Plus, Valentini says, “given the very attractive valuation levels of European companies, we’re finding a lot of opportunities there.”
One example is UniCredit, Italy’s largest bank. “While the banking system in Italy still has significant problems,” he concedes, UniCredit is “restructuring its capital position, raising capital and also embarking on an ambitious cost-cutting program [that] will allow [it] to earn returns closer to its cost of equity. And given the current valuation of the company, that’s really attractive.”
Further, the bank’s outlook isn’t dependent on Italy’s fate. “If the economic situation in Europe further improves, and Italy sees improvement, too, there will be additional upside […] for the bank,” Valentini concludes.
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In an April 2017 outlook report, the IMF forecasts growth of 2.3% for the U.S in 2017, 2% for the U.K. and 1.7% for the euro area. Near-term events to watch include the next round of the French election on May 7, and the U.K. general election on June 8.