Top tips for investing in Europe

It might seem difficult to be positive on Europe with the on-going wrangling over sovereign debt in the eurozone, but experts say investors who write off European companies do so at their peril.

This is because Europe is home to 130 of the world’s largest 500 companies, and following the recent bout of stock market volatility, these companies are starting to look good value.

Kevin Lilley, manager designate at Old Mutual European Equity Fund tells Money Matters his top tips and current themes for investing in European equities.

Bearing in mind the mandate of his fund is to invest in Europe, his arguments for the sector are still compelling.

1) Invest in mega caps

European large cap stocks currently look very good value. In many cases, these are global rather than European businesses, with strong brands that can be sold into growing demand in emerging markets. Under a third of Nestlé’s total sales, for example, originate in Western Europe, less than those coming from developing markets.

In aggregate, European companies have around half of all sales are coming from outside Europe. While providing exposure to higher growth regions, European mega caps offer the comfort of good corporate governance and transparent regulatory regimes.

2) Take another look at pharmaceuticals

The large pharmaceutical companies were de-rated as investors feared the impact of patent expiry and growing competition from lower cost generics. However, there are a number of examples of companies which have bought into growth through acquisition of higher tech businesses – Sanofi buying Genzyme, for example, or Roche buying Genentech. Sanofi has significant exposure to emerging markets, while cost savings are generating cash to pay down debt. These offer low valuations, high yield and now a return to growth.

3) Value to be found in automotives

This is a variation on the mega cap theme. The focus is on businesses with strong finances and brands that can be sold into global demand. Mainstream volume manufacturers tend to be too exposed to declining demand in southern Europe as well as to the ‘squeezed middle’ in their home markets.

Daimler has the core brand strength with Mercedes, of course, but it is also caught up in heavy vehicles and an unfunded pension. BMW is the preferred stock, as a ‘pure play’ – as a luxury brand it is relatively resilient at home and sought-after worldwide. It has strong cash generation and has a forecast dividend yield comfortably over 4 per cent.

4) Always invest in quality

Companies that show consistent growth, with good yield and compelling business models – ‘quality’ stocks – will tend to outperform in the period leading up to the peak of the cycle. They are not defensive as such, but they are more resilient than highly operationally-geared cyclicals. A good example is SES Global, a Luxembourg satellite operator which has performed well through the market turmoil. It is the world’s largest TV broadcast platform, hosting Sky, the BBC and ITV. Growth will come from emerging markets, new formats (such as HD) and military applications.