European Equity Favourites

In spite of fears that a correction is on the cards European equities continue to edge upwards. Hints of an economic recovery, signs of possible inflation, an interest rate outlook that is has changed direction and a bond market that is losing steam keep on propelling prices upwards despite several headwinds.

History has shown that attempting to time an entry point does not always pay-off as the market often continue to reach higher levels before any retrenchment; and the investor waiting for a correction ends up a bystander in a prolonged rally.

At this stage the risk of buying at expensive levels is ever-present and therefore careful investment choice is crucial. One way to future proof a portfolio is to invest in reliable large caps for the long term. The following are our favourite from the European Equity theatre.

European Auto Suppliers

Several European auto companies have presented their financial results for the quarter ending December 2016. Results have been mostly positive, but most companies are being guarded regarding the outlook for 2017.

Sales growth in Europe and China is expected to be positive albeit at a slowing rate. A US border tax under Trump may impact sales and profit margins of companies that export to the US.

However, valuations remain attractive for European manufacturers. German automakers appear particularly cheap when compared to the market index. If the European and Global economy continue to show signs of a recovery the auto sector, at current prices, presents a good investment opportunity.

Our top preference is for suppliers to the sector with a focus on technology. Firms providing automobile technology, in particular clean emissions technology and self-driving aids, are preferable.

European Banks

The European Banking industry still faces a difficult revenue environment; interest rates are still at ultra-low levels, which still puts pressure on lending margins. Loan growth also remains subdued as the European economic recovery continues to stutter.

However, a range of positive expectations support a recovery in European Bank stocks. The overall capitalization of the sector is in a much better situation than it was a few year back. Problem areas still exist, like in Italy, however, solutions are being sought by the governments and authorities.

Expectations of a reversal in ECB policy sometime this year together with signs of a return of inflation provide support for the idea that the worst is over for the sector. Recent German inflation accelerated above 2 percent for the first time in more than four years, adding to signs of gathering momentum in Europe’s largest economy.

The continued pick-up in inflation will feed into discussions among European Central Bank policy makers at their next meeting on March 9 about whether the time has come to discuss an exit from unconventional policies.

Our preference is for large well capitalised banks that preferably distribute dividends. The French Banks probably come closest to this description.

European Insurance

European Insurance have consistently returned capital gains for several years. Good dividend pay-outs together with the potential capital appreciation has kept this sector at the top of our favourite list.

Low interest rates continue to weigh on the sector, in particular for life insurers. Our preference is mainly for the well-capitalized firms with high dividend yields. We expect these firms to partake in M&A activity or cash buybacks.