Opportunities in EU despite problems: Templeton

Given the escalating economic headwinds and stability threats, Europe, in its current state, epitomises a “low-growth, high-risk” environment, and many investors are reluctant to invest in the region. Yet, headline concerns are obscuring significant bottom-up equity opportunities for patient, contrarian, value-oriented investors, according to Templeton.

Though considerable risks to regional economic growth and financial system stability clearly persist, any peripheral defaults would likely be organised and deliberate, and policymakers will likely defend Italy, Spain and the core economies of the euro zone as necessary.

Opportunities exist in Europe as valuations have continued to reflect extreme pessimism in the region and have made little provision for a potentially improving scenario.

European earnings multiples were near 30-year lows at less than 10 times trend profits, as of December 31, despite the fact that blue-chip European companies have generated significant cash flows and profits and have been among the most operationally stable and geographically diverse of global enterprises.

Healthcare is a sector that may offer attractive values in a low-growth economic environment, though the sector has sustained a significant de-rating over the last several years as concerns about patent expirations, regulatory uncertainty and pipeline productivity persist.

The fact that pharmaceuticals industry revenues historically have not been closely correlated to global GDP growth is a well-known and obvious attribute in a low-growth environment.
The companies best suited to weather top-line pressures could be those with the most scope for cost cutting and other self-help measures. Pharmaceuticals companies have some of the highest cost structures of any global industry group, suggesting that significant potential for cost cutting exists. Indeed, notable restructuring initiatives among a number of large pharmaceuticals companies are already underway.

Telecommunications stocks have also de-rated over the past decade, but as businesses transition to data providers, they offer potentially significant growth.

Telecommunications is another sector with revenues that historically have been only lightly correlated to global economic growth given the increasingly non-discretionary nature of the sector’s products and services. In the developed world, mobile device penetration is often over 100 per cent and demand for high- value, data-intensive smartphones has remained strong. Meanwhile, mobile telephony growth in emerging markets also continues to accelerate rapidly.
But, like healthcare, telecoms may offer investors more than just a buffer against slowing global GDP growth. From a total return standpoint, telecommunications companies can be compelling, as they have been generating among the highest free cash flow yields and paying among the highest dividends of any global industry group.

Technology, the storybook growth sector, has fallen from lofty heights a decade ago, but can still offer strong potential returns.

The tech story is similar to telecoms in many respects. After trading like broken growth stocks for several years following the collapse of the TMT Bubble, select tech stocks have now assumed a value profile as earnings multiples have compressed and business franchises have compounded in value.