I'm a European Investor, get me back in here!

By Emma Black (Investment Manager at Tier One Capital) 30 January 2014

As we begin 2014 we expect to see global markets continue to perform in much the same manner as 2013, although we anticipate higher volatility this year relative to last. Economic data from around the world continues to be positive with falling unemployment and positive growth in the developed world. This positive data is feeding into our cautiously optimistic view for the coming year and we believe that there are a few main areas to monitor throughout 2014.

The first area for you to monitor relates to central bank monetary policy. We believe that monetary policy will remain loose so as to be broadly supportive of economic growth around the world. In December the US government announced that from January 2014 it will add to its holdings of agency mortgage-backed securities at a pace of $35 billion per month rather than $40 billion per month, and will add to its holdings of longer-term Treasury securities at a pace of $40 billion per month rather than $45 billion per month. This modest reduction signalled the onset of tapering and was coupled with the statement that to remain supportive of continued recovery in the US market, the Federal Open Market Committee shall persist with its highly accommodative stance of monetary policy that it reaffirmed as being appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens. This forward guidance has reiterated that it is likely that such policies will continue to be pursued even after the point at which US employment falls below the 6.5% unemployment rate threshold. Here in Europe, central banks continue to follow the same guidance. Speaking at the World Economic Forum in Davos, Bank of England governor Mark Carney offered indications that interest rates in the UK are to remain low, stating that there is no immediate need to increase interest rates. We believe that it is likely for interest rates to begin to gradually rise from Spring of 2015 however it is unlikely for there to be any significant change felt in 2014.

In addition to our belief that monetary policy will remain loose is our view that Europe represents a significant value opportunity. Since the economic crises of the global credit crunch and the sovereign debt crisis of the Southern European economies, investment managers have sought to gain exposure to the emerging world. Their primary response was to take positions in those companies that indirectly offered exposure to emerging markets through investing into European multinationals that conduct major operations in Latin America, Asia and the Far East. Large cash outflows were felt from the US and Europe following weak and fragile data with pressure placed on emerging market currencies as funds flowed in to try to earn returns outside of the traditional safe havens. Throughout 2013 however the emerging world appeared to have lost its sparkle, with emerging market debt falling on average by -13.30% while emerging market equities lost -5.80%. This month alone has seen emerging market equities losing a further -6.84% given political unrest in Turkey and Ukraine as well as high inflation of 25% in Argentina. Moreover, China has felt an economic slowdown, and given the reliance of most other emerging markets on China for international trade, this will undoubtedly continue to have a downward effect.

With emerging markets expected to fall back even more therefore we believe that now may be the right time to be bringing funds back into European markets with the principal aim of participating in the European recovery story. Economic data has shown that many economies are starting to take their medicine. The Eurozone has now registered back-to-back positive growth in the latest two quarters. The convergence of unit labour costs across the Eurozone has also provided a healthy signal that macroeconomically Europe is headed into recovery. Greece has now already seen a massive haircut to its GDP of some 25% and we believe there is little room for this to realistically move any lower. Ireland, the first economy into the sovereign debt crisis, is seemingly the first to come out of it, reducing unit labour costs significantly and recording positive growth towards the back-end of 2013 resulting in all three credit rating agencies restoring their investment grade status. Together, this signals Europe is entering now into a period of relative stability with significant upside potential moving forward.

On a sector basis, Europe also offers some attractive opportunities in pharmaceuticals and financials in particular. Vitor Constancio in October 2013 focussed a lot of attention onto European banks highlighting them as more attractive investment opportunities as opposed to the US, with slightly higher Tier 1 capital ratios on a median level. In our view, financials in Europe do offer a value opportunity. Multiples are at attractive levels and while their recovery may not be instantaneous, we do feel a calculated growing exposure could yield well over the medium to long-term.

Equally, the pharmaceutical industry is attractive not only in Europe but also on a global basis. Henderson are reporting high expectations for the number of products to be launched in the industry over the coming years. At the same time, there has also been a concerted global governmental push for investment into further research to continue the fight against cancer while Obama and Cameron have both recently announced plans to support development into drugs focussed on the mitigation of Alzheimers. We believe that pharmaceuticals therefore could also be good investment over the medium-to-long term, with Astrazeneca a potential stock to watch following disappointing results in 2013. CEO Pascal Soriot has indicated that it could be not until 2017 that a turnaround is seen at the company. However, Reuters reports that the company has 11 new drug programmes that are entering into Phase III of clinical testing with a further 19 that could enter Phase III by the end of 2014 into 2015. Moreover rumours of a Phase III Alzheimers drug is also causing support for a recovery to be seen. Should these clinical tests go well, Astrazeneca would be the first pharmaceutical company to have developed a suitable treatment for the condition that could lead to a significant diversifier for the company as a result. In addition, the safer science houses of Roche and Merck & co are also predicted to perform well in the coming years after delivering strong results in 2013.

For those looking for advice on how to navigate global markets amidst uncertainty, our advisers at Tier One Capital are available for consultation at your convenience. Please contact a member of the team to learn more about how we can help manage your wealth. 


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