For global investors who can literally go anywhere, developed markets happen to be an attractive place to be during the past few years as a source of both dividend growth and the best risk-adjusted returns.
It’s driven a lot of money into U.S. stocks, where valuations are still reasonable and the business cycle continues to be in its middle stage. But with the European Central Bank implementing quantitative easing, corporate profitability growth in Europe is poised to outperform those of the U.S.
Why this chief investment officer is shunning the U.S. towards Chinese stocks
The S&P 500 is 35-per-cent higher than it was at its 2007 peak, and it\’s also more expensive on the price-to-earnings basis.Read on
“On an absolute basis, Europe looks relatively inexpensively. It also looks cheap on a relative basis,” said Andy Nasr, a portfolio manager at Middlefield Capital Corp. “And the most important thing to remember is that salary is still very depressed since you haven’t were built with a huge margin uplift. It’s been a lot tougher for corporations to get lean.”
The Middlefield Global Dividend Growers Class, that is part of Nasr’s roughly $1.1 billion in assets under management and is up about 20 per cent in the past year, had been heavily overweight U.S. equities. However, about nine months ago Nasr started reducing that exposure to about 35 percent, while enhancing the fund’s European weighting to roughly 40 per cent.
“Now that QE is within place, the economy is stabilizing, so you should have a bit of revenue growth, and some more flexibility when it comes to tax and employment,” he said.
The combination of those activities should lead to earnings estimates getting revised higher, then margins increasing. There hasn’t been a lot of that yet, as corporate profit margins in Europe are still about 300 basis points less than where these were in 2007, prior to the financial crisis.
In addition to the ECB’s aggressive efforts to rekindle inflation and economic growth, the weakness of the euro goes a long way to boosting the competitiveness of European exports. Lower oil price are also a big help to the European economy, much like low interest rates.
As an effect, Nasr is finding value in parts of the European consumer sector C specifically some auto parts stocks, as new vehicle registrations are near multi-decade lows. He highlighted the chance in companies Valeo SA (FR/EPA) and Perelli & C. SpA (PC/BIT) that sell auto parts that help reduce carbon dioxide emissions, as more stringent standards are arriving the next decade.
“This isn\’t just happening in Europe, but China and The united states as well,” Nasr said.