Europe offers a once-in-a-generation buying opportunity

Continental Europe currently offers the best buying opportunity in at least a generation, and is the best placed equity market to benefit from a US-led recovery, says Barry Norris, partner at European equity boutique Argonaut Capital.

Norris, whose Argonaut European Alpha Fund has returned 41.2% against a sector average of 16.2% since launch, says Europe is now the cheapest equity market in the world on a price-to-book valuation basis. As European markets traditionally have higher beta than other developed markets, Norris argues that now is a fantastic opportunity for investors to buy into European equities before a sustained recovery takes hold.

"When economic growth is recovering and equity markets are rallying, Continental European markets tend to go up more than other developed markets," he says. "Investors have tended to react too late to this and only bought into Continental Europe at the end of a bull market. This is a once-in-a-generation opportunity to buy into Continental Europe while it is cheap and well positioned to benefit from a US-led recovery, which should lead markets higher."

Norris, who says he more bullish on Europe than at any time since 2006, says the fact that markets have rallied more than 30% since their March lows should not deter UK investors from investing in Continental Europe. Indeed, he says prices are still nowhere near reflecting the strides European companies have made in recent years to improve their profitability.

"Markets have rallied hard from their March lows but that is still 50% below 2007 levels. They are only now at the same level as they were 10 years ago, and valuations have not been this cheap since the early 1980s or mid-1970s. While the last 10 years have been a ‘lost decade' in terms of investment returns, Europe's companies have made very real progress increasing sales and profits over this period."

Norris points out that many of these companies are global leaders in their sectors, which he says is another reason why UK investors, who have traditionally shied away from European equities, should cast aside their natural reticence to invest in the world's largest economy.

"UK investors are often unenthusiastic about European equities but the fact is that the European Union is the world's largest economy, with Germany the world's largest exporter. Nestle, the world's largest food company, is European, as is Nokia, the biggest mobile phone company, and Arcelor Mittal, the world's largest steel company. And they aren't the only market leaders in Europe. The sheer size and global importance of the European economy makes it an integral part of any long-term equity portfolio."

Norris believes that size should not be the only factor driving investors towards Europe, however, pointing out that currency factors could soon have a beneficial impact on many European companies.

"A US-led recovery will lead to a stronger dollar and that will be a big positive for Europe's exporters, who have fought the headwind of a strengthening currency for a decade. Particularly likely to benefit will be leading consumer goods companies such as BMW, Daimler, LVMH, Electrolux and Nokia. In addition, these powerful brands have competitive advantages which are not easily lost through lower cost competition."

Indeed, Norris says investors should embrace the idea that recessions are often a good time to buy equities, despite the apparent counter intuitiveness of this approach.

"Although companies' prospects may not look good in a recession, this often makes it a great time to buy equities. In this environment stocks become cheap: earnings are very low and market expectations are focused on the poor economic situation, which reduces the amount people will pay for those earnings. Often, however, sentiment is at its weakest near the bottom of a market. When things are really bad, it can often be true that things can only get better. Investors should realize that if the European economy were to merely normalize, they could make a lot of money."