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November 6, 2017 | 11:45 | Dubai
As conditions in Europe’s economy and financial markets have improved recently, substantial differences at a sector level have appeared across the region’s assets. In its recent edition of EMEA Perspectives, J.P. Morgan Private Bank’s Gabriele Zaninetti explores Europe’s recovery and the opportunities for investors through selective exposure to European assets.
“With a bright outlook for the global economy as well as an improving domestic situation, we believe risk assets across Europe offer the potential for attractive returns. Following impressive performance in recent years, the region appears to be entering a period where granular selectivity is increasingly important,” explains Gabriele Zaninetti, Head of Investments for the Middle East and North Africa, J.P. Morgan Private Bank.
Across Europe’s core markets, President Macron’s pledge to modernize the French labour market has the potential to boost the earnings growth of French companies, which remain depressed relative to both their pre-crisis levels and recent performance of German businesses. Zaninetti explained: “Compared with other European countries, we like the composition of France’s equity market. It has a higher weighting to domestic companies, and is in a prime position to benefit from the uptick in economic activity. We also have a positive view on banks, which make up a substantial portion of the market.”
For investors who do not want to take on additional equity market risk, corporate hybrids are a source of potentially attractive returns. A diversified portfolio of corporate hybrids can provide significant exposure to the ongoing recovery and growth in core Europe. According to Zaninetti: “When compared with high yield bonds, current hybrid bond yields look attractive against where they have been trading historically. They provide exposure to investment grade issuers in core Europe but offer more attractive risk-adjusted returns than other assets due to the subordinated format.”
Although much attention has been focused on Europe’s core, improvements in the macroeconomic situation have not been limited to this area. Europe’s emerging markets are benefiting from more stable global commodity prices, an increase in international trade volumes and improvements in investor sentiment. Poland, Russia and Turkey all seem to be experiencing economic upturns and their currencies have stabilised after years of depreciation against developed countries.
“One of the opportunities we have identified involves investing in fixed income securities denominated in Turkish lira, where double-digit yields are available on short maturities of only a couple of years, with bonds issued by supranational agencies of particular interest. Naturally, such an investment involves exchange rate risk. Although it is far from certain that the Turkish lira will strengthen materially, the era of rapid depreciation appears to have ended,” according to Zaninetti.
With Europe’s economy and financial markets improving over the past couple of years, Europe’s banking sector also offers selective opportunities. Zaninetti explained: “European banks suffered stability issues in the most recent recession of 2012 owing to a burden of bad debt, but there are now opportunities for attractive returns from investments in both equity and fixed income securities. Share price volatility, cash flow returns and the ability to increase market share are all themes likely to continue to drive the dispersion of asset returns in this sector.”
Zaninetti concludes: “For some time now, J.P. Morgan Private Bank has maintained a positive view on Europe’s investment environment against a background of improving economic growth, falling unemployment, supportive central bank policies, and a rebound in business and consumer confidence. We find numerous opportunities within this vibrant, dynamic and varied market, which investors can exploit to improve the risk-adjusted returns of their portfolios.”