Despite the volatility caused by Britain’s vote to leave the EU, European equities are recovering their earnings and still hold opportunities for investors.
In an investor update, Hsia said since the Brexit vote the UK economy had remained stable due to the resilience of its industries, he has 27.6% of fund exposed here.
‘European stock markets fell immediately after the vote, but never below the lows of February, which were sparked by concern about falling global growth. Economic activity continued to show stability and consumer spending, on things such as automobiles, remained steady,’ he said.
Hsia added that the valuations of European equities are attractive based on the recovery potential of earnings. European companies remain at a long term discount and look attractive when compared to US equities.
‘Valuations compared to bond yields show a large gap has developed compared to history as loose monetary policy has taken yields to record lows. Some cynics may argue that value has leaked out of the earnings power of European corporates through mechanisms such as higher corporate debt or loss of market share to overseas companies.’
‘However, we note that corporate balance sheets are the healthiest since before the financial crisis, and there is no evidence of market share losses in industries where Europeans are strong. Indeed, European companies are big exporters with 2-3x more exports than the US as a % of GDP,’ he said.
In terms of holdings, Hsia said companies with a global competitive advantage can go anywhere in the world to win business.
German software company SAP is one example, he said, and it is the fifth largest holding in the fund at 3.2%. Hsia also holds 2.7% in French spirit producer Pernod Ricard.
‘European companies are big exporters with two to three times more exports than the US, as a percentage of GDP. Very few brands can compete with European companies in the luxury brands space, as well as the spirits brands or the premium automobile brands,’ he said.
‘European companies are also well positioned in a range of less immediately obvious sectors such as resources (BHP Billiton and Rio Tinto), renewable energy (Vestas Wind) and personal care (Henkel).’
Over three years to the end of September 2016 the Investec GSF European Equity fund returned 37.04% in euro terms. This compares to a rise of 20.49% by its Citywire-assigned benchmark the FTSE World Europe TR EUR over the same time frame.