Europe’s Stocks Could See a Rapid Rally, Fidelity Says

(Bloomberg) -- Investors have taken such a defensive stance on European equities amid trade wars, Brexit and recession risks that a rapid rise could be on the cards if things turn out for the better, according to Fidelity Investments.

“It could be the breeding ground for quick equity market gains if we see that the situation is not as bad as many have positioned for,” Christian von Engelbrechten, a portfolio manager, said in an interview in Frankfurt. He oversees 1.1 billion euros ($1.2 billion) of assets including the Fidelity Germany Fund, which has beaten the market by 10 percentage points over the past five years.

Engelbrechten is positive on German equities. As the economy cools, stocks are supported by valuations in line with the historical level, an average dividend yield at 3% and solid balance sheets and cash flow, he said. To play it safe, he looks for companies that can grow independently without a strong macro environment, due to innovation, new products and increasing market share.

He favors software giant SAP SE for its recurring income, Fresenius Medical Care Ag & Co. KGaA for its non-cyclical business model and Airbus SE to benefit from increasing air traffic. Sectors like steel and automotive remain difficult, given their inability to structurally grow profits, he said. But he’s overweight on Porsche Automobil Holding SE because of its relative valuation.

High-level negotiators from the U.S. and China are scheduled to meet on Thursday and Friday for the first face-to-face discussions on trade between senior officials since July. On the basis that there will be some trade agreement and a global economy growing by 2% to 3% next year, profits of German companies could grow by 5% to 6%, Engelbrechten said. With the dividend yield it gets close to 10%.

“I like to be positive and think that neither the U.S. in the election year 2020 nor China during the 100-year anniversary of the communist party in 2021 would like to see their economies in recession,” he said.

To contact the reporter on this story: Jan-Patrick Barnert in Frankfurt at jbarnert3@bloomberg.net

To contact the editors responsible for this story: Beth Mellor at bmellor@bloomberg.net, Jon Menon

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