Many good Italian companies are available at inexpensive prices, including the country’s biggest retail bank, Intesa Sanpaolo.Alessia Pierdomenico/Bloomberg
For more than two weeks, markets around the world have been marching to the beat of Europe's drummer as negotiations between Greece and its creditors reached a fevered pitch.
That much was evident on Thursday morning, when a German government official indicated that the country would say nein to Greece's request for a six-month extension of its loan agreement. The Athens Stock Exchange had been flying high, up 4.3 per cent intraday until that moment. Less than 15 minutes later, it was down 1.4 per cent. Meanwhile, S&P 500 futures gave back about a half a per cent over the same brief span.
David Moss, head of European equities at F&C Asset Management (which is owned by Bank of Montreal), believes a compromise between both sides will be reached and says the volatility stemming from these continued talks provides ample buying opportunities.
According to Mr. Moss, the outlook for European equities is buoyed by a potent trifecta: the collapse in oil prices, which boosts consumers' disposable income, the decline in the euro, which will aid export-oriented firms, and full-scale quantitative easing, which will improve confidence.
"European companies are trading at about average valuations on earnings 35 [to] 40 per cent below previous peak, and have much more cyclical catch-up available," said Mr. Moss. "The highest yield globally is Europe, at about 3.5 per cent – it's a decent yield while you wait, and you're paying less for it."
One of his largest positions is a contrarian bet on Intesa Sanpaolo, the biggest retail bank in Italy. Regions that are unloved, like Italy, he says, offer opportunities to find good companies at inexpensive prices. Mr. Moss admits the bank has had issues with non-performing loans, as has its peer group, but is conservative by nature and has seen this metric improve in the most recent quarter. The implementation of reforms to the nation's Popolari co-operative banks should also spur consolidation in the sector, he believes.
For the euro area as a whole, the portfolio manager stressed the need for additional structural reforms to unlock the currency union's long-term growth potential.
"It needs to happen more; if it doesn't, then Europe can't move on properly," he said. "Germany, at one stage, was called the 'sick man of Europe' after reunification. What did Germany do? They reformed aggressively and the economy became more dynamic."
In spite of the political turmoil, fund managers have taken a shining to Europe in 2015 amid the backdrop of more aggressive central bank easing and better than expected economic data. Citigroup's euro area economic surprise index is currently at its highest level since September, 2013, and the gross domestic product of 18 countries that share the common currency expanded by slightly more than economists anticipated during the last three months of 2014.
According to Merrill Lynch, flows into European equities have increased for five consecutive weeks, totalling $15-billion (U.S.) over that period. In February, a net 51 per cent of fund managers surveyed by the bank named the region their top pick for equities over the next 12 months.
This trade, according to Merrill Lynch European equity and quantitative strategist Manish Kabra, is looking a bit crowded. "Sentiment has gotten ahead of the fundamentals on European equities. It is as if there is not a single bear left," he said. "We will need to see a strong recovery very soon to keep the bulls happy."
Mr. Moss, on the other hand, thinks we're only in the early stages of increased inflows to the region.
Moreover, he's confident that a fragmentation of the currency union is not in the cards.
"The European Union was never an economic project, it's politically based in order to make sure the issues of the last 100 years never happen again," he said. "I think there will be more tough periods, but it will still be here in the same form in five years' time."