When we look at investment opportunities in European equities, cyclical stocks seem well poised to benefit from the improving economy. That's why we are significantly overweight on the European automotive sector.
For example, the tyre maker Continental (Dax: CON) is benefiting from higher profit margins and faster growth than the rest of the vehicle parts industry. The company recently said that it expects profits for the year ahead to be better than previously forecast, and it is also very cash generative, meaning it is well placed to either buy other companies or to return cash to shareholders (or both). Both suggest potential for further share price growth.
We also still like BMW (Dax: BMW). The stock remains attractively valued and has enjoyed earnings upgrades. We also think that the market may be overlooking a major growth opportunity in the form of electric cars, where BMW has a promising yet underappreciated product portfolio.
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In fact, BMW will produce almost as many electric cars in 2015 as Tesla. Current valuations suggest Tesla's market capitalisation per car is very high, representing a huge disparity with its rivals. BMW looks a much more compelling way to play this trend.
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We also like certain European financial stocks, which are benefiting from recovering property values and a gradually improving flow of credit. They have the potential for strong earnings upgrades in future as capital ratios improve and the quality of their overall loan books picks up.
If we look at investment opportunities in the transport sector, we like Ryanair (LSE: RYA). The company has benefited from very high traffic and profitable margins. It is actively increasing its capacity and fuel efficiency, and is becoming much stronger in this regard relative to its peers.
The airline has an ambitious target of carrying 112 million passengers a year by 2019. It has also been able to pay out special dividends, which has supported the stock price.
In the telecoms sector, Orange SA (Paris: ORA) has proved an interesting story, with improving earnings streams. There has been a certain amount of creative destruction' in terms of consolidation in the French telecoms sector following the financial crisis. The result has been that those remaining have gained pricing power, which in turn has driven profit growth.
LEG Immobilien (Dax: LEG) in the German real-estate sector is an attractive opportunity, with compelling supply and demand fundamentals. LEG operates mainly in the North Rhine-Westphalia region, where demand is supported by a strong economy.
There are also supportive immigration and urbanisation trends in place, due to a healthy labour market the unemployment rate has been decreasing in recent years.
There isn't enough supply to meet demand, and we expect this to continue to drive market rents and house prices higher. LEG offers a good mix of exposure to high-growth and low-risk locations at an attractive valuation point.
And in an encouraging sign, in general, for European equities, with the most recent earnings season, we finally saw more earnings upgrades than downgrades, representing a reversal of the trend. Some of the headwinds that have dampened earnings growth, such as the strong euro, also look likely to recede.
