Where to invest in Europe

When looking at Europe, investors can focus on exports and the telecom sector.

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That’s because a weak euro, as well as improvements in regulatory and competitive environments, are creating tailwinds for those areas of the economy, says Michael Peterson, a managing principal and portfolio manager for International (ex-U.S.), European, and Global Value strategies at Pzena Investment Management in New York. He manages the Renaissance Global Value Fund.

He adds, “A decline in the euro, particularly relative to the [U.S.] dollar, is stimulative to any company where exports make up a reasonable amount of revenue and income. We have a number of such names benefiting in the portfolio [over] the past 12 months,” including Volkswagen, Continental AG and Imperial Tobacco.

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Peterson is also optimistic about telecom companies, which have benefited from general improvement in Europe’s economic environment. And, he says, “In terms of the regulatory environment, there was a lot of pressure from regulators on telecom operators a few years ago. [Regulators were] cracking down on, or reducing, a number of fees and prices in the sector, with the idea of giving relief to consumers.”

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At the same time, there was stiff competition in Europe when it came to pricing across the telecom sector. “Going back five or six years, pricing in the sector was high, and profitability was very high,” Peterson notes. “[But] what happened preceding our entry into the sector was that profitability declined to a point where we judged downside and continued worsening of those trends to be unlikely.”

And now, “Regulators are starting to [become] more constructive and are wanting to create more incentive for investment in the sector. [They’re] being much less harsh in terms of insisting on pricing reductions.There’s also possibly the recovery of [trading] volumes, but we’re really just at the beginning of that [trend].”

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In addition, says Peterson, “there’s been some definite speculation in the sector around possible M&A activity, which has [boosted] stock prices.” He finds names such as KPN and Vodafone have been strong performers as a result.

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Overall, “General economic improvement [in Europe] seems to be happening in early stages, assisted by not only the currency move but also by the move in energy prices—Europe is much more of a consumer than a producer of energy.

“That’s been conducive to better economic demand. And, since Europe is a market where profitability has not fully improved back to pre-financial crisis levels, any movement in the direction of improving volume and operating leverage is helpful.”

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What’s more, Peterson predicts Greece now poses more of a political threat than an economic threat to the Eurozone. “I’d say the Greece crisis mostly represents a long-term political crisis, in terms of Europe’s commitment to the single currency.”

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