Each week, a professional investor tells MoneyWeek where he'd put his money now. This week:Blake Crawford, portfolio manager, JPM Europe Dynamic (ex-UK) Fund.
Over the past five years, European companies' earnings have lagged behind those of the US, as America's growth has powered ahead. But that is starting to change, which bodes well for the market.
We've seen more upwards revisions to European corporate earnings estimates (as a whole) for the first time since summer 2011. Macroeconomic headwinds are turning into tailwinds. The collapse in the oil price has cut costs for European companies and increased disposable incomes for consumers. And the significant decline in the euro has bolstered European corporate competitiveness.
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Eurozone economic data continue to beat expectations, leading analysts and policymakers to upgrade their growth estimates. Economic surveys continue to provide solid evidence of a turn in the euro area's growth momentum. Deflation fears have troughed and inflation expectations are recovering from a low base.
Credit is flowing more freely not only are banks making it easier to get loans, but demand from both households and businesses is on the rise. Finally, consumer confidence is rebounding, despite concerns about Greece.
These tailwinds are being felt by European companies. Pan-European earnings saw no growth at all for the past five consecutive years. We are now seeing estimates for 5% growth. And that number masks powerful underlying growth at the sector and country level.
For example, if we exclude the energy sector, which has been dragged down by the oil price, aggregate earnings growth estimates rise to 10%. If we further strip out areas struggling with idiosyncratic issues, such as Switzerland's problems with the strong Swiss franc, estimates climb even higher, to nearly 15%, and are still being upgraded.
Importantly, it is the rate of change in growth expectations rather than the growth levels themselves that invariably dictate and drive stockmarket momentum.
As we look for corporate earnings to finally deliver on the improving business landscape, a selective approach is critical. We look for attractively valued, high-quality stocks with positive momentum. Here are three examples.
Jewellery company Pandora (Copenhagen: PNDORA) had a bumpy period immediately after going public five years ago, and the share price dropped by nearly 85%. The extreme valuation, alongside signs of strong cash flow, improving quality and rebounding momentum persuaded us to buy into the stock more than three years ago.
A continuous pattern of improving earnings has led to a more than 20-fold increase in the share price since its market low in late 2011. It's a great example of how identifying positive momentum in under-recognised growth opportunities can pay off.
Swiss recruiter Adecco (Zurich: ADENE) has delivered encouraging results. It beat hopes on profit margins, and the outlook is positive. As the economic recovery continues, this should feed into a more buoyant labour market, while operating leverageshould see potential earnings upgrades and a higher valuation placed on the stock by investors.
Stock exchange operator Euronext (Paris: ENX) has performed strongly since it listed. Increased market volatility has driven volumes higher, boosting the company's top line results. Cost savings are also well ahead of analysts' hopes. The combination of the two factors has resulted in the company surpassing analysts' estimates at each set of results since flotation.
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