Brenda Vingiello, Sand Hill’s Chief Investment Officer, joined Squawk Box to discuss her thoughts on the latest market trends and market outlook for 2025. This
Germany Prevails – Will the E.U. be as Victorious?
Published Date : July 18, 2014
Many Americans seem to have a love affair with Europe, but following several choppy years that included a long recession and a sovereign debt crisis, many investors have taken the region off their radar screen. Without question the countries that make up the E.U. vary wildly, yet when combined they represent the largest economy in the world. With the region in the early stages of an economic recovery, interest costs on government debt substantially reduced from their highs, and a strong market for German and E.U. exports, we see value in Europe. However, much like the recent World Cup, where Germany won the world’s largest soccer tournament, a European “victory” (recovery) isn’t likely to materialize without a few bites, flops and hugs along the way. In many ways, Europe today looks a lot like the U.S. did several years ago, and the region has a lot more expansionary capabilities as a result.
The U.S. market has appreciated 200% from the low in 2009. Even though the economic recovery has been slow, profit margins have improved from the 2009 all-time lows to current levels, which are near all-time highs. So will the Europe of today provide a similar opportunity to the one the U.S. presented several years ago? While the answer to this won’t be known for several more years, Europe appears to be positioned to deliver outsized investment returns relative to our domestic market. European companies are still in the early stages of realizing profit margin improvement; when combined with modest economic growth and more attractive valuation, this has great potential to fuel outsized earnings growth and market returns relative to the U.S. for many years to come.
The U.S. economic recovery has now reached a later stage and the Federal Reserve is in the process of pulling back stimulative asset purchases. Meanwhile, the European Central Bank has indicated a desire to continue to stimulate the E.U. economy by keeping interest rates low and potentially implementing a quantitative easing program. This likely means an interest rate increase will occur in the U.S. long before it occurs in the E.U. Any resulting strength in the U.S. dollar relative to the Euro would be very advantageous to European exporters and could provide another avenue of earnings growth relative to the U.S. Exports are twice as important to European GDP as they are to our domestic GDP, which means this could have a substantial impact on E.U. GDP growth.
At Sand Hill Global Advisors we continue to carefully monitor economic trends in Europe. While a full recovery may not come together until the late stages of the match we realize it is still early and feel opportunity exists in the region as a result of potential economic and operating margin improvement relative to other developed markets. As part of our process we take advantage of opportunities when fundamentals appear to be improving and pricing is attractive. For these reasons, we feel the region represents an attractive long term investment opportunity and, in similar fashion to the victorious German “footballers,” has the needed elements to result in an E.U. victory.
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