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European energy equities in favour
30 January 2014
Value investing good for medium term, says Brandes Investment Partners
Brandes Investment Partners
European equities are ripe to offer good returns over the next
five years, believes Brent Woods, chief executive officer of
Brandes Investment Partners.
He notes that value stocks in Europe - those trading at low
multiples of book value, earnings and cash flow - have
remained cheap relative to European equities in general. "On a
medium-term basis, we observe many companies that have the
potential to continue to grow revenues and profits and have low
stock values," he says.
"The most interesting stocks can be found in the value segment
of the market, as this group's valuation discount to the
overall market is well below the 20-year average on a variety
of measures," adds Jeffrey Germain, senior analyst. "As value
investors, we believe, and empirical evidence shows, that
buying stocks that are discounted versus their true intrinsic
value can result in outperformance over longer periods of
Germain highlights energy and utilities as two attractive
sectors for investing in Europe, as these stocks have the best
long-term valuation metrics. This is in spite of the market
penalising integrated oils due to high capital spending, low
growth and concerns about downstream profitability. "Total has
fallen out of favour with the market," he says.
Iren suffered during the peak of the sovereign crisis in Italy,
however "60% of the business is regulated, so we did not
envisage much downside in earnings," he says.
Woods adds that GDF Suez is another stock that has spooked the
market due to increasing competition from rising capacity of
subsidised renewable energy and a corresponding divergence
between oil and gas prices. "We think the market is
perpetuating its issues, even though GDF has a good balance
sheet and significant assets outside of France."
Although the MSCI Europe Growth Index has outperformed the MSCI
Europe Value Index over the past seven years, posting a return
of plus 12% versus negative 26%, Woods adds that value has
outperformed growth over the previous year. "We are optimistic
for our style and we are now hopefully coming off a period when
value has underperformed.
The core strengths of some of the individual companies are not
reflected in their stock price and that gives us some level of
optimism over the medium term."