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Comment: Investing for recovery? Choose Europe over the US

Andrew Williamson-Jones, manager of the BlackRock Global Equity Fund, explains why he believes European stocks are likely to fare better during the recovery period than their counterparts across the Atlantic.

If you believe in recovery, choose Europe over the US. The stock markets of Europe are more exposed to so-called cyclical industries that in a recovery perform better than defensive industries, which make up a greater proportion of the US stock market.

Cyclical industries include engineers, Germany's Daimler for example; discretionary goods producers such as France's LMVH or Switzerland's Swatch; capital goods manufacturers such as Siemens and commodities companies such as Rio Tinto. In a downturn these businesses are hit hard, but in recovery they can be very effective investments as customers return and as confidence and valuations recover.

In contrast, the US stock market has a greater proportion of defensive industries such as pharmaceuticals, Pfizer for example. However, even within the more defensive areas of the market, European companies tend to have greater cyclicality. For instance, consumer staples such as Kraft earn more than 80 per cent of their profits in the US, while UK-based SAB Miller gains more than 75 per cent of its profits from emerging markets.

Added to this, European companies have a greater proportion of their sales overseas, which is important since the recovery is being driven by the emerging markets of Asian and Latin America, not by the US.

In financials, Europe again scores ahead of the US. The US was first into the downturn and was the first to start to recover. US financials were no different but that means that US financials, JP Morgan for example, have already climbed further out of the valley and trade on a 20 per cent higher valuation than their cousins in Europe. Also European financials didn't experience the same bull market exuberance of the US, so their hangover of bad debts is smaller.

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