European energy equities in favour

European energy equities in favour

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 time.”

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.”