Article / 25 March 2015 at 10:15 GMT

What's Europe got to offer in the diversification game?

Head of Equity Strategy / Saxo Bank

 BT's astutely-played hand during the English Premier league talks means Jose Mourinho
and his Chelsea team will continue to play on the channel from 2016-17. Photo: istock

By Peter Garnry 

Last week's first look at equity diversification focused exclusively on UK and US companies. This week's piece now takes a closer view of the European equities that we think should form part of your risk-adverse portfolio strategy.

Let's reiterate the rules first as established in the first piece. No harm in that after all.

Diversification is the closest you get to the holy grail of investing. By expanding the number of stocks in your portfolio from 1 to 10, the diversifiable risk is reduced by 75% The portfolio will still have risk but it will be closer to that of the market. 

The risk reduction from 2 and 3 stocks to 10 stocks is 65% and 50% respectively. So with little effort your portfolio gets a better risk profile with no material drag on your potential return.
Saxo equity alpha picks (EU large caps) 

The table below represents Saxo’s top equity picks among EU large caps based on the best mix between quality, valuation and positive price action.

Below are recent events and the positive drivers for each stock. 

BT Group: showed recent discipline in the Premier League auctions; key focus on £12.5 billion acquisition of EE, to finish in 15/16; high quality company with expanding margins .

GlaxoSmithKline: positive Q4 EPS surprise and sales in line with estimates; analyst sentiment is mixed, but in our view analysts are underestimating the company’s earning power .

Unilever: will benefit in ’15 from the lower euro as 73% of revenue comes from outside Europe; the current catalysts for the share price are a return to top line growth and margin expansions .

Imperial Tobacco Group: strong H2 results that beat estimates by 3%; expectations have come too much because of growth issues on the Russian and Iraqi markets, but we believe the valuation is too low given the outlook.

• Inditex: revenue growth has accelerated from the low point in 2013 and the operating margin is holding the line; the company has very high ROIC and there is upside potential from internationalisation and increased e-commerce execution.

LVMH: industry leader in luxury benefitting from the lower euro with 70% of revenue coming from outside Europe. Valuation is fair given the stock’s high quality and outlook .

• Deutsche Post: disappointing Q4 result with profits missing by 10% against expectations; growth in global trade will still support stock and valuation is attractive in an industry that is consolidating.

Rio Tinto: tough ’15 ahead in terms of revenue growth as commodity prices across the board remain subdued; attractive valuation given the quality of the business .

• Henkel AG: the market is worried about margin pressure, but our view is that it will be offset by higher growth from a rebound in Europe’s economy and FX gains from lower euro .

• Airbus: record order book; Q4 EPS surprise of 31% driven by strong demand on the backdrop of growing global air traffic and lower fuel costs; strong product portfolio and high ROIC .

 It's where Henkel gets all its best work done. Photo: istock

— Edited by Martin O'Rourke

Peter Garnry is head of equities strategy at social trading leader Saxo Bank


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