Europe's rise worth a closer look

IS Europe the place to be for Australian investors? If the latest economic growth statistics are any guide, it most certainly is.

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IS Europe the place to be for Australian investors? If the latest economic growth statistics are any guide, it most certainly is one of them, but it's definitely a case of mapping out your investment itinerary very carefully.

Data released last week from the European Union's statistics office, Eurostat, showed that GDP growth across the eurozone rose 0.3 per cent during the second quarter, which is one of the first tentative signs that the economic crisis of a year ago is effectively over. Europe currently has a strong current account surplus on rising exports, while business conditions and confidence measures are also pointing in a positive direction.

Yet, while some countries such as Germany and Britain are steadily moving out of recession, others such as Greece, Spain and Italy are still contracting.

Kerr Neilson, one of Australia's most experienced inter-national investors, is very positive about Europe.

"If you look at the periphery, each and every one (countries) has a current account surplus," says the Platinum Group boss. "The significance of that is these countries are no longer dependent on foreign funding because they have contracted to the extent that they are now self-funding from a currency flow point of view. That may not tell us that they've bottomed, but I think there's enough evidence to suggest that they have."

It's all about participating in the strongest growth sectors, and for Neilson that means buying into badly beaten-up European banks rather than defensive stocks. He's bought into companies like Intesa Sanpaolo, one of Italy's largest banks, which holds 20 per cent of the deposit base in Italy and currently trades at 0.6 times book value. Another has been the Bank of Ireland, which is currently trading at just 23 euro cents, up from 9.4 euro cents a year ago.

On the other hand, Platinum has been trimming its holdings in companies such as German homewares manufacturer Henkel, sporting goods maker Adidas and French beverage maker Pernod Ricard.

Neilson reiterates that the real money in Europe will not be made in defensive companies.

"Essentially, we're going after the jugular. We've been tending to cut back on the defensives and we're tending to now go to the financials.

Certainty was what everyone was absolutely craving a year ago. It's precisely where you don't want to be (now)."

Shane Oliver, head of investment strategy and chief economist at AMP Capital, says the good news flowing out of Europe has seen more money pouring back into the region. But he says the ideal time to invest in Europe was probably in 2011, when it was at the bottom of its cycle. Yet he still sees further opportunities.

"I think the Australian sharemarket will go higher but I think there are better prospects in Europe. The overall PE in Europe is 11 times, in Australia it's 14 times. I think it does make sense for investors to look at Europe."

For David McDonald, chief investment strategist at Credit Suisse, Germany is one market investors should look at.

It recorded growth of 0.7 per cent in the last quarter, following zero growth in the first quarter, and a 0.5 per cent contraction in the last quarter of last year.

"We think that Germany particularly is an attractive market. Exporters are doing well and the cyclical side of Europe generally is something we would focus on, including engineering and automotive, (sectors) that benefit from the US recovery as well as Europe picking up," he says.

Financial stocks globally, including Europe, are another focus for Credit Suisse right now, says McDonald.

Growth prospects are certainly good in Europe but there is still a sting in the tail for Australian investors.

Since the start of the year the Australian dollar has fallen more than 12 per cent against the euro, and experts say its descent isn't over yet.

"The euro will continue to strengthen against the (Australian) dollar as the global recovery solidifies and becomes more entrenched and the region's tail risks diminish," says Richard Yetsenga, head of global markets research at ANZ.

"Our forecasts over the next year have the Australian dollar depreciating five to 10 per cent against the euro," he says.

But a falling dollar presents opportunities for those who want to capture the currency benefit, either through domestic companies with exposure to the euro or European-based listed companies.

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While Europe's peripheral countries are still weak, and the fundamental issues that saw the near collapse of the region a year ago have yet to be been fully addressed, there's no denying the shift in growth expectations for the Continent.

It certainly presents investors with an opportunity, albeit a somewhat risky one given the fragile rate of recovery and the effect of a deteriorating currency exchange rate.

Tony Kaye is editor of Eureka Report. To read more by Tony Kaye and other experts, go to www.eurekareport.com