Allianz Global Investors sees exciting investment opportunities in European equities this year on the back of their strong fundamentals, exposure to high growth markets, attractive valuations, as well as the ability to deliver sustainable dividends amid the low interest-rate environment, as the European economy continues to improve supported by accommodative European Central Bank policies.
AllianzGI anticipates moderate global economic recovery in 2014. The US economy has improved considerably as evidenced by recent encouraging data, whilst China has also started transitioning more positively under the new leadership. European economy is on its way of continued recovery, recording stronger growth than in previous years.
“We expect to see modest growth in Europe this year supported by accommodative ECB policies," says Neil Dwane, AllianzGI’s Chief Investment Officer, Equity Europe. "Progress should be made in 2014 with respect to not only the supervision of the EU Banks through the Asset Quality Review, being overseen by the ECB, but also through steps towards a proper banking union and bad bank resolution process. ”
“Nevertheless, there will also be turbulence in the EU politically as we may face an Italian election given the fractured nature of the coalition as well as a tide of anti-EU protest votes in the EU parliamentary elections in May 2014. Chancellor Merkel will have her work cut out for her as she attempts to cajole the EU to come closer to her vision of ‘more Europe’ whilst also trying to stop the UK from voting to leave and mollify regions like Catalonia which may wish to leave Spain. Our central case remains that the EU and the Euro will not break up and the progress towards the US of Europe will continue. ”
Interestingly, there has been a reverse in the divergence of core and peripheral European countries. AllianzGI notes that the momentum seems to be better in some of the peripheral countries where actual austerity has been implemented like Ireland and Spain, and this is counterbalanced by growing weakness in the core of France and the Netherlands.
Source of potential income
On the investment market in 2014, AllianzGI expects investors to remain challenged by low interest rates and policy easing through negative deposit rates, where savers will suffer from negative real yields and governments will continue to tax their way to success rather than restructure their over-leveraged debt-fat economies and lifestyles.
“With fixed income assets and cash to remain repressed, investors have little alternative but to take smart risk. Equity funds not only protect purchasing power but also has the ability to achieve long-term, inflation-beating return potential.”
The US Federal Reserve’s pledge to keep short-term interest rates at low levels – despite the start of tapering – also implies that investors’s search for income is set to continue. Dividends, with their ability to generate higher and regular potential returns, are more important than ever.
Investing in high-quality European corporates with global exposure
AllianzGI believes investors should look at European corporates – some of the strongest and most successful ones in the world. These corporates have become highly agile and adept at growing new market share in other markets. Taking Europe as a whole, for example, in 2013 over 50% of corporate earnings originate outside the region, benefiting from higher rates of growth in emerging markets and the recovering US market.
In terms of performance, Euorpean equities have seen gains of over 15% in 2013 whilst most of the BRICs (Brazil, Russia, India and China) and emerging markets are flat to down.
“The key is to identify high quality European blue chips with strong financial health, which are well positioned to deliver long-term capital growth. By investing in quality European companies with proven dividend records backed by stable cash flows, investors are able to achieve a sustainable stream of income. Dividends from European equities are also higher than bond yields, offering a good way for investors to diversify their portfolio,” Dwane adds.
“From a valuation perspective, European equities are also competitively priced, presenting attractive opportunities for investors.”
On sectors to perform well in 2014, AllianzGI favours renewable energy underpinned by a rising demand for energy efficiency and pollution control measures adopted in China and other economies.
“Given the aging population, we also favour pharmaceuticals and health-related industries which supply the needed care of the old while benefitting from the emergence of new amazing technologies and tools to cure disease. We also expect to see strong demand for luxury goods within consumers as the world's middle classes continues to grow. Media and advertising agencies look well placed to enjoy both the ‘old wave’ of technology, media and telecomm convergences whilst adding the ‘new wave’ of social media and apps,” Dwane concludes.