Supportive conditions for value equities in Europe
Sept. 24, 2015
From the long-term debt dramas of the so-called PIIGS countries (Portugal, Italy, Ireland, Greece, and Spain) to persistent deflationary pressures, the euro zone has been on the blunt end of many less-than-flattering headlines in recent years. However, we believe the news has been less downbeat as of late. For instance, fears of a messy Greek exit from the euro zone seem to have subsided since the recent approval of a €86 billion bailout.
And at this point, we think the euro zone will continue on its slow and steady course toward recovery. Real gross domestic product (GDP) was essentially flat in both 2012 and 2013, and rebounded to 1.4% in 2014. Growth is expected to accelerate further to 1.7% in 2015.
Supportive factors at the company level
We believe several key factors deserve particular attention because of their ability to influence the operating performance of individual companies within the euro zone.
- 1The sharp depreciation in the euro. Exporters have benefited from the depreciation in the euro, whose trade-weighted value has fallen dramatically due to quantitative easing (QE) by the European Central Bank (ECB) and concerns about Greece.
- 2The collapse of the price of oil. Lower oil prices have decreased energy input costs for companies and boosted consumer confidence and demand.
- 3Low inflation. Consumer price inflation remains very low, chiefly due to low energy prices and the tepid rate of economic growth in the euro zone. It provides a more favorable environment for sustained economic growth and job creation.
- 4Improved bank lending conditions. Improved conditions have been driven mainly by a more favorable cost of funds and better balance sheet conditions.
- 5Low interest rates. The ECB has followed up on its promise to do “whatever it takes,” which has pushed bond yields down from crisis levels to record lows.
- 6Gradual improvement in the demand for labor. The unemployment rate, though still high at 11.1%, has come down from crisis highs.
A range of more micro, or company-specific, factors has also played a role in making the euro zone more attractive for stock pickers like us. Among them:
- Increased shareholder activism has pressed company executives to sharpen their focus on shareholder returns (through initiatives that include dividends and share buybacks).
- Merger and acquisition (M&A) activity has increased, with more acquirers homing in on European targets.
- Attractively low valuations are prevalent, as well as higher dividend yields, especially versus the United States and Asia. (Lower multiples are particularly evident for value equities, as shown in the chart below.)
Value equities appear attractive to us
Generally speaking, European growth equities have outperformed value stocks during the past 12 months, according to returns posted within the MSCI EAFE Value Index and the MSCI EAFE Growth Index. When viewed in relative terms, valuations for value equities are therefore attractive. Have they reached an inflection point?
Chart is for comparison purposes only.
Delaware Investments analysis. Monthly observations.
Note that relative performance is plotted on a cumulative sum basis, reflecting excess performance of value equities over growth equities, reaching back to a base year of 1983.
Index returns are calculated net of taxes; this rate of return assumes the minimum possible dividend reinvestment after deduction of withholding tax (at the highest possible rate).
Past performance does not guarantee future results.
Even in a supportive environment, research makes the difference
We believe the circumstances listed above are contributing to company-specific investment opportunities within the euro zone. As bottom-up stock pickers, we highlight them not because of their lowered costs and improved revenues, but because of their nuanced effects on the overall investment landscape. These factors carry dramatically different implications at the company level, depending on variations in each company’s industry positioning and global footprint.
As global equity managers taking a contrarian approach to bottom-up stock selection, we use the uncertainty of macroeconomic and valuation cycles to bring to light opportunities at the company level, because it is there that we believe careful analysis has the potential to provide positive and relatively consistent returns over the long term.
The views expressed represent the Manager's assessment of the market environment as of September 2015 and should not be considered a recommendation to buy, hold, or sell any security, and should not be relied on as research or investment advice. Views are subject to change without notice and may not reflect the Manager's views.
Carefully consider the Funds' investment objectives, risk factors, charges, and expenses before investing. This and other information can be found in the Funds' prospectuses and their summary prospectuses, which may be obtained by visiting delawarefunds.com/literature or calling 800 523-1918. Investors should read the prospectus and the summary prospectus carefully before investing.
IMPORTANT RISK CONSIDERATIONS
Investing involves risk, including the possible loss of principal.
Past performance does not guarantee future results.
The MSCI EAFE Value Index is a subset of the MSCI EAFE Index, which measures equity market performance across developed market countries in Europe, Australasia, and the Far East. The MSCI EAFE Value Index consists of those securities classified by MSCI as most representing the value style.
The MSCI EAFE Growth Index is a subset of the MSCI EAFE Index, which measures equity market performance across developed market countries in Europe, Australasia, and the Far East. The MSCI EAFE Growth Index consists of those securities classified by MSCI as most representing the growth style.
Index performance returns do not reflect any management fees, transaction costs, or expenses. Indices are unmanaged and one cannot invest directly in an index.