Professional Investor: Don't be an investment Eurosceptic

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The Independent Online

However, behind the gloomy economic headlines lies a vibrant corporate culture in which thriving, world-class companies are improving productivity and focusing more than ever on creating value for their shareholders.

To improve competitiveness and boost profitability in a harsh, globalised world, many European companies are restructuring their operations and examining ways to grow more profitably. For example, it is estimated that 100 German engineering companies are currently discussing with members of the IG Metall union measures for improving productivity through new working practices.

This new, value-enhancing corporate environment is further illustrated by companies such as Germany's Deutsche Bank, which is benefiting from a global cost-cutting programme. This has included the fairly radical decision to sell its UK asset management business, prompting a rise of more than 10 per cent in the share price this month.

The success of restructuring is also clear at Sweden's Ericsson. It has been undergoing a restructuring plan that has brought down costs , with unprofitable divisions sold or shut down, and a new joint venture with Sony for mobile handsets. The result of this has been a 500 per cent rise in the share price from its low.

The higher profits produced by Europe's corporate restructuring are increasingly finding their way back to shareholders through higher dividends and share buybacks. A look at Europe's stock markets over the last year shows how this theme has helped to boost returns for UK investors. Over the 12 months to 30 June, European equities, as represented by the MSCI Europe (excluding UK Index), returned 19.1 per cent in sterling terms.

Europe's recent outperformance is not a short-term cyclical event, but clearly it is important to realise that Europe is not immune to global head winds such as a high oil price and geopolitical events. Even so, the corporate reform that lies behind Europe's recent outperformance will continue to support stock market returns.

It's not only companies that are changing. Slowly but surely, European governments are also moving in a new direction with the gradual implementation of business-friendly legislation across the continent. There have already been corporate tax reductions in Austria and Greece, while Germany and Portugal are discussing tax reforms.

What is equally as exciting for UK investors is that Europe offers a larger universe of companies from which to select stocks, which gives investors massive scope to find interesting, often overlooked, stocks that can deliver outstanding returns irrespective of market direction.

They include companies such as OPAP, the Greek gaming company, which trades on a very attractive dividend yield of more than 5 per cent. It is enjoying strong growth in sports betting in Greece, with new games still being introduced to an eager market.

Another attractive company is Aker Yards, a Norwegian shipbuilder, which remains attractively valued despite a rapid increase in its profits. Cruise companies had reduced their investment spending due to economic uncertainty a few years ago, but with demand for cruise holidays remaining strong, orders for new ships have recently picked up. Aker Yards is a major beneficiary.

Broad support for the European stock market comes from valuations, which still do not look stretched despite the recent sharp rise in share prices. In fact, prices today are no more expensive compared to earnings than they were in the summer of 2003.

In summary, Europe offers the UK investor the opportunity to invest in a region that has been undergoing positive change and yet whose valuation remains attractive. These factors typically lead to a healthy return.

Ajay Gambhir manages the JP Morgan Fleming Europe Dynamic (ex UK) Fund.

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