EUROPE – Many European stocks are undervalued, according to active investment manager GAM.
Niall Gallagher, investment director of the European equities team, told IPE: "Currently, European companies are artificially cheap only because they are domiciled in Europe.
"Investors focus on the macroeconomic view too much when it comes to European companies because many of them are global and driven by what is happening in emerging markets rather than in Europe.
"Exports from Spain to emerging markets, for example, have increased more – 76% – than they have from the UK – 47% – over the last six years, according to Graham Turner Economics.
"European equities are trading at a 33% discount to the US market on a Shiller price earnings ratio basis when they tend to grow in line with US companies."
But Gallagher acknowledged that more investors outside Europe are now investing in European companies than European ones.
European pension funds, he said, are driven towards passive investing and a higher bond allocation by regulation.
Gallagher was generally positive on the prospects of Continental Europe, saying the long-term structural adjustments made recently left countries such as Italy and Spain close to current account surpluses and in much better shape than the UK, the "sick man of Europe".
"As the export and manufacturing sector failed to respond to the devaluation of the British pound, the only result of the devaluation was higher inflation," he said.
One of Gallagher's largest holdings is Swiss elevator company Schindler, which has experienced good growth in emerging markets as well as some European and US growth, also because of its aftermarket revenues.
Due to their strong balance sheets, undervaluation and cash generation, luxury goods companies, auto-component suppliers and healthcare firms also make up large positions in his portfolio.
But GAM does not currently invest in telecoms, large banks, insurance stocks or large integrated oil companies, which generate little volume growth at present.
"A lot of bank stocks oversold in 2011 and were in distress in 2012," Gallagher said.
"We temporarily held a lot of bank stocks such as Erste Bank, ING and RBS last year, but have been actively reducing our bank positions since.
"The 5-10 year prospects for bank stocks do not look great."
GAM holds 38 and 35 stocks in its Europe and Europe ex UK funds, respectively.