Simon Davis, Co-Head of International Equities, March 27, 2015
Across Europe, we think structural change is leading to increasingly compelling opportunities for investors.
Consolidation among French telecoms, for example, has curtailed what had long been fierce industry competition and has greatly enhanced the return potential of a smaller number of key players.
Ireland is recovering
Similarly, Irish banking has undergone a process of consolidation that enhances the return potential of a smaller group of lending institutions, particularly those who are positioned to benefit from improvements in the domestic commercial real estate market. Overall, gross domestic product in Ireland has not only stabilized but has increased meaningfully since the financial crisis. The government has been quite aggressive in tackling its debt and deficit problems, and real estate prices are recovering. To us, this bodes well for further gains as valuations normalize in the financials and real estate sectors.
The euro may stabilize
Some estimates for 2015, for example, suggest that in local currency terms, European equities may rise by double digits for the year. However, euro weakness relative to the U.S. dollar could roughly halve the value of that return when it is translated back into dollars.
It is worth pointing out, though, that the euro, not to mention the yen, has already depreciated substantially relative to the U.S. dollar, and so going forward international investors might not experience such a dramatic adjustment in return translation. At the same time, corporate earnings of international companies in 2015 are likely to benefit from the year-on-year change in currency values.