Each week, a professional investor tells us where he'd put his money. This week: John Baker, JP Morgan Europe Dynamic ex-UK.
Economic momentum across continental Europe has been strong in recent quarters. Investors have seen improving labour markets, solid real wage growth and stronger public spending trickling through. What's more, attractively valued European equities have been bolstered by policy support from the European Central Bank (ECB). On a price-to-book and dividend-yield basis, European equities are below their own historical average and look cheap compared with expensive bonds.
However, investors cannot ignore the fact that European equities are enmeshed in a number of uncertainties. Although uncertainty is an enduring feature of the asset class, markets do not respond well to it. One of the biggest ambiguities is how Brexit negotiations will unfold and whether Europe moves towards greater integration or begins to fracture. In addition, if the UK economy does meaningfully slow as a result of Brexit, it poses a risk for Europe, given the UK is a large trading partner.
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Other political risks on the horizon include several European elections. France and Germany go to the polls for national elections in 2017 and the Italian constitutional referendum is more imminent. Italian banks are an ongoing source of concern for investors, given the increasing likelihood that they may have to be bailed out in some fashion. But, against this backdrop, it's worth noting that this type of environment is a positive one for stock-pickers because volatility creates opportunities.
German sports-shoe manufacturer Adidas (Frankfurt: ADS) is benefiting from strong brand momentum in North America and China. Adidas recently signed a strategic collaboration to promote sports in China, where there is an increasing interest in fitness, while football (soccer to Americans) is one of the fastest-growing sports in US high schools.
It is also a beneficiary of the "athleisure" fashion trend, as demonstrated by the rising popularity of white trainers. Adidas had strong first-quarter results and upgraded guidance for the rest of the year it is forecast to deliver double-digit sales growth.
The French bank BNP Paribas (Paris: BNP) is another potentially overlooked stock. BNP's domestic retail operations are benefiting from cost cutting historically, operating efficiency hasbeen low, but the bank is rationalising a dense national branch network. Banking remains an unloved sector, but the stock is attractively priced. It's trading at just 0.6 times book value with a forecast yield of 7%.
Italian automotive manufacturer Brembo (Milan: BRE) makes high-performance brake discs for cars. It is the official brake supplier to the McLaren Mercedes Formula 1 team. Brembo has a track record of consistently beating expectations over the last few quarters, with positive sales momentum and better than expected net debt levels.
John Baker is fund manager of the JPM Europe Dynamic ex-UK fund.
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