European stocks will rally further as valuations remain below historical levels and the region has several companies that will increase profits regardless of economic concerns, according to Manning & Napier Inc.
“Valuations in European equities reflect a pretty elevated level of fear, so they are a bit more attractive,” Marc Tommasi, head of global investment strategy at Manning & Napier in New York, said in a phone interview yesterday. “Europeans have the tools they need to deal with the challenges creating that fear.”
The firm, which manages $42 billion, remains overweight on European equities, holding more stocks than are represented in global benchmarks, even after the Stoxx Europe 600 Index surged 16 percent from its 2012 low on June 4.
The gauge is trading at 1.5 times the book value of its member companies, compared with 2.2 times for the Standard & Poor’s 500 Index, data compiled by Bloomberg show. The Stoxx 600 has closed every quarter between March 2002 and September 2008 above 1.6 times book value, reaching a high of 2.5 times in December 2006.
Stocks climbed as a new government reduced political uncertainty in Greece, yields on Spanish and Italian bonds fell from record highs and global central banks cut the cost of borrowing and increased asset purchases to boost economic growth.
The European Central Bank’s willingness to use the full force of its balance sheet to help resolve the region’s debt crisis lessens risk even though growth may be constrained in all developed markets including Europe, Tommasi said. While growing unrest in Spain against proposed austerity measures is a potential risk, it’s also the reason valuations remain subdued, he said.
“The market is well aware of the risks and is over-discounting those risks,” he said.
Manning & Napier’s preferred stocks in the region include Germany’s Adidas AG and Siemens AG, Spain’s Amadeus IT Holding SA and the Dutch biotechnology company Qiagen NV.
“We’re also bullish because we’re able to find companies that have an ability to grow regardless of what the general economies are doing, either because of secular growth that they have exposure to or because they have a competitive dynamic within a specific industry,” Tommasi said.
Earnings of companies listed on the Stoxx 600 will rise 13 percent to 25.57 euros per share in 2013, compared with a 6 percent growth in 2012, according to the average of analyst estimates compiled by Bloomberg.
There is a “significant upside” to the profit-margins potential of Adidas, the world’s second-largest sporting-goods maker, from its acquisition of the Reebok brand in 2006, Tommasi said.
Siemens is attractive because the company is restructuring its portfolio into businesses with a “much better secular growth theme,” he said.
Amadeus, the world’s biggest processor of travel bookings, helps aviation companies cut costs and thus boost their return on assets during a difficult period for the aviation industry, Tommasi said.
Manning & Napier is also betting on Qiagen as the molecular diagnostics and genetics market is growing even as there are “headwinds to overall medical spending around the world,” he said.