European Growth – ever more attractive valuations

Sharon Bentley-Hamlyn is finding attractive valuations across several Eurozone countries; here are her latest views

Sharon Bentley Hamlyn, commented,

“At the end of August, we opined that now might be a good time to look at Europe again because it would be difficult for the ECB to justify higher rates as Germany was technically in recession. US inflation was coming under control and interest rates had probably peaked. Inflation was falling and was down at 5.3% in the Eurozone in July. The above has turned out to be largely correct. Interest rates are on pause in the US and Europe. Eurozone CPI has fallen further to 4.3%. We did not however, anticipate expect weaker markets. Sentiment has not been helped by central bank comments that interest rates would stay high for longer, and the spike in the oil price has not helped either. Whereas market focus was previously on the direction of interest rates, it is now on the potential for recession in 2024. Given deflationary pressures coming from China the challenge will be finding companies where pricing will hold up, rather than companies benefitting from their ability to raise prices in the high inflation environment recently experienced.

“Renewables have been weak across the board. They outperformed last year supported by the higher oil price, but this year the price performance has diverged. Fears of Chinese dumping of solar cells and lower power prices have had a negative effect. Generally, concerns about economic growth and geopolitics in regard to China have weighed on the European technology sector.

“The portfolio is currently trading on a PEG ratio of 0.8x conservative full year EPS expectations. H1 saw a 35% average increase in EPS growth. With the market expecting just 23% for the full year, only a marked slowdown in H2 would prevent the portfolio exceeding this level of growth. We do not expect such a slowdown, given that it was in H2 2022 that most of the margin compression occurred, due to supply chain disruption around covid. The portfolio therefore looks very modestly valued on current (and forward) PEG ratios.”

 
Sharon Bentley-Hamlyn is Director at Aubrey and Manager of the Aubrey European Conviction Strategy