Europe now poised on a ‘hairpin bend’

Martin Payne, divisional director of Brewin Dolphin in Leeds, believes the region is at a “hairpin bend” and despite the ongoing uncertainty could present some opportunities for the contrarian investor.

He said: “If you have just returned from a sun-kissed holiday in Europe you may have noticed how your pound went that bit further than it did a year ago. You have the euro crisis to thank for that. The shenanigans across the Channel meant that your pound was worth more than 1.25 euros compared to barely one euro a year earlier.

“But given the perilous state that many European economies find themselves, questions do remain over whether you’ll be exchanging your pounds for euros next summer. The euro’s survival is still in the balance, more than two years on since Greece agreed to its first bail-out, the Greek debt burden shows little sign of abating.

“Today, it is no longer just about Greece. Spain, Portugal and Italy have been dragged into the mire too. Unemployment across the Continent is rising – in Spain the rate has increased from 21.7 per cent to 25.1 per cent – and economists are cutting their growth forecasts.”

Moody’s Investors Service has changed its outlook on the AAA rating of the European Union to negative, warning it might downgrade the bloc if it decides to cut the ratings on the EU’s four biggest backers: Germany, France, UK and Netherlands, Mr Payne added.

He said: “Now the focus is firmly on European Central Bank president Mario Draghi, who said he would do ‘whatever it takes’ to save the euro and has now unveiled his new buy-all bonds programme to help Spain and Italy carry on without a formal bail-out.

“If Spain and Italy accept the tough terms and now the German Courts have ratified the deal, European governments have a chance to get their finances into shape and so it could prove a turning point.”

Hence the hairpin bend analogy. “Not surprisingly, investors are still nervous and equity shy,” Mr Payne said.

“But despite the uncertainty, opportunity might be starting to knock for investors. Much of the doubts and pessimism have been priced in to European stock markets. This means that if Draghi’s plan succeeds in kick-starting a recovery then investors could, reasonably, expect to see some uplift in share prices.

“Blue-chip European exporters and overseas earners, for instance, could benefit despite the turmoil once the situation improves.”

Shares in German car manufacturer Daimler look attractive on several levels, he suggested. At the end of the year it will launch its new high–margin S-class and A and B-classes, which should be cheaper to make than its predecessors, he said. Mr Payne added that premium car sales in China continue to be extremely resilient: up 15 per cent in the first four months of 2012 with sales aligned to bigger cars with larger engines. And a recovery in the US economy could also benefit Daimler trucks.

He also singled out Nestlé, best known for its coffee and chocolate bars, as another firm that could buck the trend given its long and consistent track record of delivering on its target.

Mr Payne said the Swiss group

has managed to consistently gain market share over the last decade, while distiller Pernod-Ricard has also shown itself to be one of the strongest worldwide, with very good pricing power and resilience – even growth – through economic downturns.

“Given the endless stream of gloom coming from Europe you might think it would be crazy to start investing in the region.

“Yet it is often worth taking a look at some unloved areas of the stock market. After all, some of the greatest investors have gone against the grain and been handsomely rewarded.

“One such investor was John Maynard Keynes. Maynard Keynes was, perhaps, the most famous contrarian investor of them all. It is worth remembering what he said in the aftermath of the Great Depression in 1937. ‘It is the one sphere of life and activity where victory, security and success is always to the minority and never to the majority. When you find anyone agreeing with you, change your mind’.”

The holiday season may be over, but it might be worth keeping Europe in your mind a little longer, he concluded.