Aim for companies with international ambition
Residents of the United States, please read this important information before proceeding
Please read this important information before proceeding.
When choosing a fund, bear in mind that focusing on a particular sector in Europe might not be a good idea, as it could expose you to a raft of firms with mixed performance, instead of the select few that sell high-quality offerings to international markets.
Take the European car industry, for example. As a whole, it is in a terrible position: in 2012, European demand for new cars fell to an 18-year low – a complete “carmageddon”, as one analyst put it. And, worryingly, the fall shows no signs of stopping. Deutsche Bank analysts expect another four per cent drop in European car demand in 2013. If they are right, it would mean just 13.5 million new cars sold all year, a massive drop from the heady days of 2007, when the equivalent figure was 18 million.
However, not all car firms and parts suppliers are facing the same fate. Those worst affected are the “volume producers”, who churn out cheap cars for their domestic markets; shares in Peugeot, Fiat and Renault, for example, have all been hammered as local buyers have put off replacing their older cars.
Yet some of the higher-quality German manufacturers have been more successful: their European sales have proved more resilient, and they have done a great job of winning new business in Asia and the US. BMW, for example, now sells more than half of its cars outside of Europe, with strong Chinese sales in particular helping the firm post record sales in 2012.
Continental Europe offers an extremely diverse market for liquid companies with attractive dividend yields.
Investing for income in Europe
Many European companies in the so-called defensive sectors have seen their share prices increase recently, as investors have sought to protect their capital.
Defensives produce essential products such as consumer staples, electricity and pharmaceuticals – products that people would continue to consume even in an extreme situation such as the break-up of the Eurozone. They do not generally offer the same enticing growth prospects as smaller firms, but they do tend to offer a steadier stream of dividends. In Europe, they are also more likely to operate in international markets and derive significant profits from other regions.
Despite their recent popularity, some still look undervalued. French pharmaceutical firm Sanofi, for example, currently trades at a forward P/E ratio of just 6.5 – around half of its five-year trailing average. It has also given investors decent inflation protection with a 3.75 per cent dividend yield.
However, some professional investors believe that there is no reason to feel limited to defensive sectors when searching for income in Europe. As Alice Gaskell, who co-manages the Blackrock Continental European Income fund, points out: “Europe continues to offer the highest dividend yield of all developed regions. European equities currently offer a dividend yield close to four per cent while Continental Europe in particular offers an extremely diverse market for liquid companies with attractive dividend yields.”
According to proponents such as Gaskell, focusing on income could help you to prevent your capital from being eroded by inflation in the short term, then provide strong growth as the Eurozone crisis subsides and share prices return to their long-term historical averages.
A word on currency risk
Finally, a note of caution:
Buying euro-denominated assets means you are taking on a currency risk. There is still a chance that the Eurozone might break up, and if it did then the underlying value of such investments would face precipitous falls.
Many professional investors believe that European shares are currently so inexpensive that any such loss would be outweighed, in the long run, by renewed growth. However, it is vital to regard any euro-denominated asset as a long-term investment of at least five years. In the short term, you should expect more volatility.