Bull and bear: Time to invest in Europe? - The Share Centre Blog

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Michael Baxter

Bull and bear: Time to invest in Europe?

Written by: Michael Baxter on July 10th 2013

Category: Bull & Bear, News

Bull and Bear – an optimistic and pessimistic view of investment news. Today’s stories include:  Time to invest in Europe?  UK retail sales rise in June. Great Grandson of Michael Marks says M&S forgot to listen. Royal Mail privatisation looms. Companies in the News: Royal Dutch Shell, Britvic and Barr,  Centamin 

Time to invest in Europe?

“As investors we have one role – that is, to find under-valued assets, whatever those assets might be,” says Stephanie Butcher, European equities fund manager at Invesco Perpetual.

She continued: “On price/earnings adjusted on a 10-year through-cycle basis, Pan-Europe is 25% cheap, Economic Monetary Union block is 37% cheap, but Italy and Spain are currently sitting in the range of 50-60% below their long-term average Shiller PEs2. So, after 5 or so years of economic trauma, with car sales, TV advertising, and property markets falling in some cases 50 per cent plus, these markets are trading at trough multiples on trough earnings.”

She added: “Valuation, yield and dividend growth opportunities in Europe are in our view attractive, but not necessarily in the ‘traditional’ income sector. Where we currently see most potential is financials, the periphery and selected cyclicals where dividend revisions are improving, and valuations and pay-out ratios are low.”

And finally: “Crucially, expectations in some of the cheapest areas of the market are modest if not outright pessimistic. Positive momentum comes in two ways; good things getting better, and bad things getting less bad.”

So is she right?

John Greenwood, chief economist at Invesco seems to have a different view. After being positive on the US and suggesting that the UK may do okay, he said: “In Europe the outlook is not nearly so promising. Although financial markets were re-assured by the statements of the ECB last July and September, economic activity has been constrained by continued austerity without monetary easing and without currency depreciation. Currently it is hard to see any basis for a recovery, and inflation continues to fall. There is a real risk of deflation in the Eurozone.”

Then again, Mr Greenwood is not really contradicting Ms Butcher. Remember, Stephanie said: “Positive momentum comes in two ways; good things getting better, and bad things getting less bad.”

So the Eurozone may or may not face many years of hardship, but equities are so cheap, they may be worth buying anyway. Don’t forget, the markets tend to overdo things during both the downturn and upturn.

And before the subject of the Eurozone is closed for today, take a look at this chart:


So can it be that Spanish exports are slowly getting better, while unit labour costs are falling, meaning Spain is slowly regaining competitiveness?

But then again, take a look at this chart, and might the reason why unit labour costs have fallen so much is because Spanish employment has been cut to the bone. The Spanish economy may recover if unit labour costs stay low while employment rises, but ‘if’ is the operative word.



UK retail sales rise in June

According to the British Retail Consortium (BRC), UK retail sales values were up 1.4 per cent on a like-for-like basis from June 2012, when they had increased 1.4 per cent on the preceding year.

Helen Dickinson, director general of the BRC, said: “Despite challenging economic conditions continuing, June saw another strong performance from the UK’s retailers, with very respectable overall growth across the categories. At this halfway point in the year we are able to see that sales are well ahead of the previous six month period, confirming that the retail recovery is continuing.”

The combination of promotions and that yellow thing in the sky putting its hat on and coming out to play made fashion was one of the winners. DIY and gardening products did well too. In fact, according to BRC, June was a record month for these two sub sectors.

When you consider that last June saw a boost caused by the Olympics, actually this was not a bad set of results.

Look at this chart for an explanation.

The savings ratio has fallen sharply.


Changes in unsecured lending may show how this happened.


So, real wages are falling, but Brits are saving less, so they are spending more. Is that a good or a bad thing, do you think?

Great Grandson of Michael Marks says M&S forgets to listen

Don’t forget the customer? “Who?” responded management at Marks and Spencer, “Oh yes, the customer forgot about that.”

Sir David Sieff, great grandson of Michael Marks himself and who was a director of the company between 1972 and 1997, said: “I would say we have lost our way. I don’t think we moved quickly enough with the times.” But then again he also said: “The company has started to listen.”

So what is the customer saying?

More dresses with sleeves, apparently. Belinda Earl, former boss of Debenhams and Jaeger and now director of style at M&S, said: “Since September we’ve been in listening mode. I’m happy to say sleeves are very much in.” And so it is that no less than 90 per cent of dresses for sale in M&S will have sleeves.

Maybe M&S buyers could have done a lot worse than do their clothes shopping in store. They may have spotted the fatal flaw.

It remains odd that Stuart Rose was hailed as the store’s saviour for so long, but now we are told the company just needs time to recover from years of neglect.

What do you think the next management regime will say?

But then they are even saying something similar about Terry Leahy at Tesco now. Tesco needs time to get over the years of big mistakes.

Royal Mail privatisation looms

Apparently, a long time ago people communicated by writing a message down on paper using something called a pen, placing this message in a paper encasing, otherwise known as an envelope, then they stuck an adhesive picture of the reigning monarch on the envelope and put it in a red box.

It is strange, but true – at least that is what archaeologists claim.

No readers here are old enough to remember such a time of course, but what is quite interesting about this old way of doing things, is that somehow – as if by magic – this paper thing went from the red box to homes and businesses.

The magic was not down to a wand or spells; rather it was down to an obscure organisation called the Royal Mail.

Then in 2013, the UK government of that time announced it was planning to float the Royal Mail. But the Post Office – that was the name given to the stores who sold those sticky things called stamps, and kind of acted a bit like a bank, but one that sees more queuing by older citizens – stayed in public hands.

The unions were not happy with the idea, and posted their disquiet in blogs across the internet.

DHL and TNT expressed interest in buying the Royal Mail outright, but the UK public were told they would be given the right to buy the shares.

But were the British public interested in buying shares, probably using the internet; perhaps emailing their friends and colleagues, or hash-tagging, or Facebooking? Send your answer to that question on a post card, please.

Companies in the News

Bull:     Over at the ‘FT’, LEX took a look Royal Dutch Shell and the appointment of Ben van Beurden as the new boss. The markets are fretting over the amount of money the company is spending on exploration and production. But said LEX: “Companies such as Shell are increasingly focused on a small number of very large projects so operational and exploration expertise is a must.” It suggested that Mr van Beurden knows as much about the company’s strengths and weaknesses as anyone.

Bull and bear:            The merger between Britvic and Barr is back on, after regulators cogitated and pondered, and decided to do nothing. In the meantime, conditions have changed and Britic – after imposing cost cutting – is in a much stronger position than before the regulator stepped in. Barr has until July 30 to put a new offer together, but given the resurgence of Britvic, Tempus at the ‘Times’ said: “but there is no guarantee this will happen and, if I had to bet, I would say it will not.”

Bear:   Shares in Centamin have increased 20 per cent since the overthrow of the Morsi government, but Tempus said it was perplexed and that looking forward, shares could move either way.

These views and comments are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees

Tags: Belinda Earl, Britvic and Barr, Centamin, european equities, Marks and Spencer listening, Royal Dutch Shell, Royal Mail privatisation, UK retail sales, UK savings

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