‘Don’t forget Paris’ – Fidelity tells SA investors

With GDP growth of many emerging economies far outstripping those of more developed regions, global investor sentiment has increasingly shifted in favour of equity markets in countries such as China, India, South America and South East Asia.

However, while these markets present significant opportunities, South Africans looking for offshore exposure should not overlook the importance of exposure to developed economies as part of a well diversified global portfolio.

According to Rita Grewal, Portfolio Manager at Fidelity, which manages the STANLIB pan-European fund, there are both structural and tactical reasons why a South African based investor could benefit from European equity exposure.

On the structural case for investing in European equities, one of the golden rules of investing is not to put all your investment nest eggs into a single basket of assets.

“There are benefits to investing in any particular region, but from a risk perspective, it is far more beneficial to get access to number of different markets in your portfolio. Going back over the last twenty years there have been years when investing in developed markets would have given you significantly better returns than investing in developing markets. While the Rand has recently strengthened against the Euro, the Rand-Euro has been highly volatile and since the launch of the Euro, the Rand has actually depreciated against the Euro, which would also have benefited South African investors.”

“Additionally, Europe has a large number of stocks that are growing on the back of structural trends. For example, while Europe may have an ageing population, many companies in the region benefit from that, particularly those operating in the healthcare and pharmaceutical sectors.”

She adds that a number of European companies derive a significant proportion of their profits from emerging markets. “For example, Richemont, which owns luxury brands such as Mont Blanc and Cartier, makes only 40% of its profits from Europe, and a significant portion of these sales are actually to tourists from emerging markets. Roughly one-third of profits come from the Asia- Pacific region.”

“This enables investors in these companies to derive the benefits of exposure to emerging economy growth, without necessarily taking on the risk of investing directly into these regions.”

Grewal says alternative energy is also a big theme right now. “In this regard, European companies, such as Vestas - the number one manufacturer in the world of wind turbines - present huge opportunities for investors.”

Tactically, says Grewal, Europe also currently offers compelling valuations compared to many emerging markets, which are the most expensive against European equities as they’ve been since 1995. “Much of this is due to the bearish sentiment that many of the large investment houses have towards European markets at present. However, with unemployment in Europe rising at a slower pace and leading indicators such as manufacturing expectations and consumer confidence improving, we see this as a buying opportunity in anticipation of a sentiment change.”

She says choosing the right sector within European equity markets is also crucial in the current economic climate. Currently, Fidelity‘s Pan European Multi-Manager Strategy is overweight consumer discretionary, industrials healthcare and IT stocks, while being underweight on utilities, telecommunications, financials, consumer staples and energy. These sector positions arise through the fundamental stock selection process, with managers choosing the best stocks primarily from within Europe.

While Grewal is confident in the prospects of European equity markets, she cautions investors to be wary of the risks in the region, such as the high debt levels and fiscal deficits that exist in many European countries.

While these are somewhat concerning, they should not deter investors from including European equities in part of a well diversified global portfolio.