Investment opportunities revealing themselves in a recession-bound Europe
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Despite short-term economic pain, borne of war and inflation, there are great investment opportunities in Europe, says Fergal Sarsfield, portfolio manager with Ireland-based Setanta Asset Management.
Sarsfield said current drawdowns offer a chance to invest in high-quality companies for the long term.
“Things may well look pretty bleak at the moment but for long-term investors, it may actually be a very, very good time to invest in Europe,” he said. “Evaluations are at levels below what we’ve historically seen. And they’re at a significant discount to where the U.S. market is.”
He also pointed to a recent Bank of America survey that showed 42% of global fund managers taking an underweight position in Europe.
“That’s actually the largest underweight in history,” he said. “Investing in Europe has never been so much out of favour. So, if you believe excess returns can be generated by going against the herd, by being contrarian, then this may well be prime time to invest in Europe.”
Speaking on the latest episode of the Soundbites podcast, Sarsfield said the European Central Bank will have its hands full battling pressures from multiple sources, including inflation, disrupted supply chains and tight labour markets. Rescuing the economy could take some time.
“It’s not a pretty sight at the moment,” he said. “There’s a lot of uncertainty out there. And I think until such time as the market can see some line of sight in relation to interest rates and inflation, market volatility will most certainly continue.”
He believes consumer confidence will ultimately determine the duration of the interest rate cycle.
“Thus far, there hasn’t been any material drop in demand, and this is forcing central banks to act by passing through higher interest rates,” he said. “When consumer confidence falls to a level where it results in a drop-off in demand, then I think we will see a better supply-demand balance.”
According to Sarsfield, history has shown that in markets that are driven by sentiment and momentum as much as they are by fundamentals, there can be dislocations between the intrinsic value of a company and what the market is willing to pay for it.
“If you have confidence in the long-term sustainable earnings power of a company, then that really presents an opportunity,” he said.
In some cases, the strength of the dollar will help boost competitiveness in the U.S. market, he said, but he prefers to find companies that have greater control over their operations and are able to drive competitive advantages internally.
For example, he likes the prospects of London-based Diageo plc, the manufacturer of globally branded alcoholic beverages.
“Diageo has very much benefited from premiumization over the last of the last number of years,” he said. “Consumers are undoubtedly a lot more health conscious now. And that’s been a factor in sort of moving away from high-calorie beer towards lower-calorie spirits, as well as trading up into more premium, more top shelf spirits. We expect that to continue for many years.”
He said Diageo generates about 40% of its revenues from the U.S., so it has been helped by weakness in the euro.
“We think they are very well-positioned for the future,” he said. “They have a pristine balance sheet. Their brand portfolio should be able to capitalize on growth in consumer spending over the medium to long term, albeit with a little bit of pain in the short term.”
Adidas AG, based in Herzogenaurach, Germany, is another company with an open runway ahead of it, he said. Along with Nike, it has built a strong position in the sports and athleisure markets, with heritage, scale of operations and financial strength — all of which is keeping competitive threats at bay.
“We think that over the long term, that tailwind of a more health-conscious world and people exercising more and participating more in sports will certainly benefit Adidas.”
This article is part of the Soundbites program, sponsored by Canada Life. The article was written without sponsor input.
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