ADRU DBEU DBEZ DEUR DEZU DRR EEA EPV ERO EUFL EUFN EUFX EUO EURL EZU FEEU FEP FEU FEUZ FEZ FIEE FIEU FXE Games GSEU HEDJ HEZU HFXE IEUR IEV Invesco US PTEU RFEU UEUR ULE UPV URR VGK

Despite Lower GDP Growth, European Earnings May Accelerate In 2019

Despite Lower GDP Growth, European Earnings May Accelerate In 2019

Brexit uncertainty has captured the headlines, however we’re constructive on high quality progress holdings

Posted by Richard Nield, Senior Portfolio Supervisor on Nov 1, 2018, in Equities

Despite lower GDP growth, European earnings may accelerate in 2019

For months, Europe has grappled with geopolitical uncertainty within the type of ongoing Brexit negotiations (which face a looming March 2019 deadline) and Italy’s populist coalition authorities. In this setting, UK corporations have appeared much less more likely to make investments – which might result in decrease European progress ranges subsequent yr.

So what do Brexit doubts imply for our staff’s Earnings, High quality, Valuation (EQV) outlook for the UK and eurozone? Let’s start by dispelling three myths concerning the space.

Three myths about Europe

1. Fable 1: Europe all the time underperforms the US.
In greenback phrases, European equities have outperformed the S&P 500 Index in eight of the final 15 calendar years1 – they only have not finished so lately. However we consider there are progress alternatives on the horizon. European gross home product (GDP) is trending at a 2.three% fee for the yr,2 which is not all that dangerous for a area that has struggled with progress of late. The market has reacted negatively to the current decline in Eurozone Manufacturing PMI (which fell to 53.23 within the third quarter after peaking within the fourth quarter of 2017), and progress is not accelerating. Nevertheless, broader financial sentiment indicators similar to enterprise confidence put Europe in place to develop near 2% subsequent yr.four And, though eurozone progress has moderated, it’s nonetheless close to a decade excessive. The Invesco Worldwide and International Progress workforce feels expectations are pretty low.

2. Fantasy 2: European earnings will not be rising as quick as the remainder of the world.
Because the trough in March 2009, European earnings have solely grown at half the speed of the US. Nevertheless, once we look towards 2019, consensus expectations challenge near 10% earnings progress, just like developed markets. After witnessing years of underinvestment, we anticipate European corporations to spend money on new capital gear with capability utilization near a peak, which we consider will profit progress.

three. Fable three: Italy will depart the euro and put the foreign money union in jeopardy.
Certainly, the Italian coalition authorities has upset the markets and undermined the EU by tripling the focused finances deficit to 2.four% for 2019 – regardless of debt/GDP (at round 131%) being the second-highest in Europe after Greece. 5 Nevertheless, the truth is that over 60% of residents help the euro in Italy,6 so we really feel the danger of Italy leaving the euro is over-exaggerated.

The place are we seeing alternative?

So, what do Brexit considerations imply for our bottom-up EQV strategy? Our UK holdings within the Invesco Worldwide Progress Fund and the Invesco European Progress Fund function giant, worldwide companies with common UK publicity of not more than 10% (as of Sept. 30, 2018).

With regard to positioning, we stay obese financials, as they’re comparatively cheap and we’re well-diversified inside the area. We consider the anticipated finish of European Central Financial institution quantitative easing subsequent yr, together with still-decent progress and excessive capital ranges, ought to present our financials with an excellent risk-reward stability.

In the third quarter, we additionally initiated positions in two large-cap European holdings, TechnipFMC and Finecobank.

  • TechnipFMC (NYSE:FTI), a merger between French Technip (OTCPK:TNHPF) and American FMC, is a well-managed oilfield service firm with market-leading positions (zero.94% weight in Invesco Worldwide Progress Fund and zero.94% weight in Worldwide European Progress Fund as of Sept. 30, 2018). After a troublesome few years for the business, we’re slowly seeing new contract bookings, and whereas the order backlog is 54% under prior its peak, it’s up 15% because the finish of final yr, as of June With earnings at or close to cycle lows, we consider the corporate might profit over the subsequent few years as demand returns and because it delivers on cost-cutting synergies. The stability sheet is robust with no debt, and the shares are very cheap on mid-cycle earnings, in our view.
  • Finecobank is an Italian high-growth, high-return multi-channel financial institution, asset supervisor and brokerage enterprise (zero.67% weight in Invesco Worldwide Progress Fund and zero.66% weight in Worldwide European Progress Fund as of Sept. 30, 2018). Its market share of 1.6% is poised to ramp up based mostly on the corporate’s superior digital platform versus different banks, in our view. Returns are very engaging, in our view, with a return on fairness of over 30% and a robust stability sheet. The short-term valuation is just not cheap at 21 occasions the 2019 price-earnings (P/E) ratio – however on a three-year view, valuation is nearer to 15 occasions P/E, which we consider will show to be a very good entry worth.

The underside line

In conclusion, we really feel that in a momentum-driven market that reminds us of the late 1990s, there’s a stronger-than-normal have to believe in short-term earnings, regardless that our strategy seems three to 5 years forward. We’re witnessing extra dramatic strikes when shares of corporations barely miss expectations. In an surroundings the place US earnings progress is perhaps peaking, we consider our high quality progress fashion could be shifting again into favor as corporations with higher-than-normal earnings visibility, margin stability, robust returns and stability sheets have just lately began to outperform.

1 Supply: FactSet Analysis Techniques, Inc. European equities are represented by the MSCI Europe Index. Previous efficiency doesn’t assure future outcomes. An funding can’t be made in an index.

2 Bloomberg L.P. as of Sept. 30

three Supply: Bloomberg L.P. as of Sept. 30

four Supply: IMF as of Sept. 30

5 Supply: Monetary Occasions

6 Supply: Eurobarometer

Essential info

Weblog header picture: supergenijalac/Shutterstock.com

The MSCI Europe Index is an unmanaged index thought-about consultant of European shares. The index is computed utilizing the web return, which withholds relevant taxes for non-resident buyers.

Invesco Worldwide Progress Fund Dangers

Derivatives could also be extra risky and fewer liquid than conventional investments and are topic to market, rate of interest, credit score, leverage, counterparty and administration dangers. An funding in a by-product might lose greater than the money quantity invested.

The dangers of investing in securities of overseas issuers, together with rising market issuers, can embrace fluctuations in foreign currency echange, political and financial instability, and overseas taxation points.

Progress shares are typically extra delicate to modifications of their earnings and may be extra risky.

Shares of medium-sized corporations are typically extra weak to antagonistic developments, could also be extra risky, and could also be illiquid or restricted as to resale.

The Fund is topic to sure different dangers. Please see the present prospectus for extra info relating to the dangers related to an funding within the Fund.

Invesco European Progress Fund Dangers

The efficiency of an funding concentrated in issuers of a sure area or nation is predicted to be intently tied to circumstances inside that area and to be extra risky than extra geographically diversified investments.

The dangers of investing in securities of overseas issuers, together with rising market issuers, can embrace fluctuations in foreign currency, political and financial instability, and overseas taxation points.

Shares of small and mid-sized corporations are typically extra weak to opposed developments, could also be extra risky, and could also be illiquid or restricted as to resale.

Derivatives could also be extra risky and fewer liquid than conventional investments and are topic to market, rate of interest, credit score, leverage, counterparty and administration dangers. An funding in a by-product might lose greater than the money quantity invested.

Progress shares are typically extra delicate to modifications of their earnings and might be extra risky.

The Fund is topic to sure different dangers. Please see the present prospectus for extra info relating to the dangers related to an funding within the Fund.

This doesn’t represent a suggestion of any funding technique or product for a specific investor. Buyers ought to seek the advice of a monetary advisor/monetary marketing consultant earlier than making any funding selections. Invesco doesn’t present tax recommendation. The tax info contained herein is basic and isn’t exhaustive by nature. Federal and state tax legal guidelines are complicated and always altering. Buyers ought to all the time seek the advice of their very own authorized or tax skilled for info regarding their particular person state of affairs. The opinions expressed are these of the authors, are based mostly on present market circumstances and are topic to vary with out discover. These opinions might differ from these of different Invesco funding professionals.

NOT FDIC INSUREDMAY LOSE VALUENO BANK GUARANTEE

All knowledge offered by Invesco until in any other case famous.

Invesco Distributors, Inc. is the US distributor for Invesco Ltd.’s retail merchandise and collective belief funds. Invesco Advisers, Inc. and different affiliated funding advisers talked about present funding advisory providers and don’t promote securities. Invesco Unit Funding Trusts are distributed by the sponsor, Invesco Capital Markets, Inc., and broker-dealers together with Invesco Distributors, Inc. Every entity is an oblique, wholly owned subsidiary of Invesco Ltd.

©2018 Invesco Ltd. All rights reserved.

Despite decrease GDP progress, European earnings might speed up in 2019 by Invesco US

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