Greece’s debt crisis has dominated the headlines in Europe this year but has not halted regional growth or vitality among European companies showing unexpected earnings strength.

War and financial turmoil— the bane of Europe’s economic well-being last century—are currently veiling a rebound in regional growth and unanticipated vigor among European companies.

Europe’s economy has picked up steam even with Ukraine battling Russian-backed insurgents and Greece narrowly dodging an exit from the eurozone. Eurozone growth will probably speed up to 1.5% this year from 0.8% in 2014, according to the International Monetary Fund (IMF).

The momentum helped push up the proportion of European companies beating estimates for second-quarter earnings to 65%, the highest level since J.P. Morgan began tracking this data in 2009. Companies with the biggest earnings surprises range across sectors from health care, to telecoms, to industrials. Among the standouts in our Global Leaders strategy are multinationals with diversified sources of revenues that we found appealing during even the darkest days of Europe’s recession. These include UnileverAtlas Copco and Novo Nordisk.

Steady Tailwinds

The forces behind Europe’s revival show no sign of reversing anytime soon:

Declining euro. European exports rose as the currency fell 19% against the U.S. dollar during the 12 months through July 31. Shipments of goods to the rest of the world by the 19 countries in the eurozone increased 3% during the year through May 31, according to the European Union.

Falling oil prices. The decline in the price of oil by about 25% this year until Aug. 25 has prompted a pickup in consumer spending. Greater consumption has sped growth in the eurozone’s four largest economies—Germany, France, Italy and Spain. During the second quarter of 2015, Spain’s gross domestic product expanded 1% on a quarterly basis.

Central bank stimulus. The European Central Bank in March, aiming to push down borrowing costs, began monthly purchases of bonds totaling 60 billion euros ($68 billion). The so-called quantitative easing has curbed the threat of deflation, with prices in July rising 0.2%. Falling bond yields prompted investors to buy equities, pushing up the STOXX® Europe 600 Index. A mid-August sell-off pared the Index’s gain to 4% for the year as of Aug. 25.

Greek stabilization. Agreement last month between Greece and its creditors on terms for a new bailout should, at a minimum, buy time for the region’s expansion before any renewed flaring in the country’s debt crisis. An exit by Greece from the currency probably would not derail Europe’s recovery. Regional banks have had time to insulate themselves from a departure by Greece. Also, the country’s economy is too small to rock the entire region: Its GDP is similar in size to Louisiana’s.


Exceeding Expectations

Faster economic growth helped increase to 65% the proportion of Stoxx® Europe 600 Index companies that beat estimates for secondquarter earnings per share. That is the highest level since quarterly data collection began in 2009.


To be sure, Europe’s expansion is far from the resurgence that usually follows a recession, and the region cannot count on strong demand from abroad. The IMF in July downgraded its forecast for global growth this year to 3.3% from 3.5% in April. Also, several structural weaknesses impair Europe’s economy, such as inflexible labor markets, high unemployment and heavy levels of sovereign debt. Excessive debt-to-GDP ratios weigh on several countries, including the region’s cornerstone economies of Italy and France. The ratio for the 19 countries in the eurozone rose to 93% at the end of the first quarter from 92% at the end of 2014, according to the European Union.

Quickening Growth

Still, GDP growth in the eurozone will probably quicken to 1.7% in 2016, according to the IMF. Meanwhile, we see opportunities in European companies that lead their industries and wield strong pricing power. Firms that generate big returns on invested capital are especially attractive.

When jitters over Greek’s debt crisis pushed down stock prices in July, we purchased for our Global Leaders strategy more shares of Priceline, which provides online travel reservations. While advertised heavily in the U.S. by former Star Trek luminary William Shatner, Priceline derives about 65% of its revenue from Europe. Its is the region’s No. 1 online travel agency.

Priceline in the second quarter of 2015 reported a 26% surge in gross bookings over the previous 12 months. The company has generated an annual return on invested capital (ROIC) exceeding 30% during the past five years, demonstrating that a company with a solid business model can flourish even in a grim economy. (Accounting lesson: ROIC is net income minus dividends divided by total capital.)

Among consumer stocks, Next, a clothing and footwear retailer based in the U.K., will likely gain from rising household consumption. Credit Suisse will likely benefit from rising interest rates in the U.S. and, eventually, in Europe. In addition, the investment bank’s recently appointed CEO is expected to push forward with a restructuring plan. We also expect that earnings will rise at Atlas Copco, a Sweden-based manufacturer of industrial tools and equipment, and other companies tied to Europe’s recovering industrial sector.

We see any temporary setback in the stock prices of Europe’s most promising companies as a potential buying opportunity. We have confidence in firms with a dominant market position, pricing power and a record of making the most from invested capital. More broadly, when challenges to Europe’s economic growth have flared up, we have taken heart from the region’s longstanding record of resilience.


Please download The Advisory to read other articles in this issue including:

Shadow Consumption
By Paul Chew, CFA, Head of Investments

Economic recoveries usually feature a surge in consumption as employment and wages rebound. Current U.S. consumption data might instead suggest that many consumers are on the sidelines. But rather than clutching their pocketbooks, consumers are reaching for their smartphones and using digital technology to find bargains online and to share goods, potentially influencing the data.

Rude Awakening
By Stephen Shutz, CFA, Tax-Exempt Portfolio Manager

As recently as 2012 Puerto Rico was able to sell to investors public-sector bonds despite its bleak fiscal outlook and shrinking economy. The commonwealth’s default last month on a portion of $72 billion in troubled debt spotlights not just an ill-advised investment, but a pitfall in the municipal bond market.

Dream or Opportunity?
By Taylor Graff, CFA, Asset Allocation Analyst

China’s plummeting stock prices, slowing economic growth and currency volatility have pushed many investors out of the market. Nevertheless, we believe that a discriminating investment strategy toward China and neighboring emerging markets has the potential to yield meaningful long-term gains, especially from growth in China’s middle class.

Before Tying the Knot
By Chad Larson, Strategic Advisor

Although the divorce rate has fallen for many years, the emotional and financial costs from a split-up are often very high. Protecting inherited assets from a claim by a family member’s ex-spouse can help limit those losses. Such protection can be a cornerstone for sound estate planning.

The views expressed are those of the authors and Brown Advisory as of the date referenced and are subject to change at any time based on market or other conditions. These views are not intended to be a forecast of future events or a guarantee of future results. Past performance is not a guarantee of future performance. In addition, these views may not be relied upon as investment advice. The information provided in this material should not be considered a recommendation to buy or sell any of the securities mentioned. It should not be assumed that investments in such securities have been or will be profitable. To the extent specific securities are mentioned, they have been selected by the author on an objective basis to illustrate views expressed in the commentary and do not represent all of the securities purchased, sold or recommended for advisory clients or other clients. The information contained herein has been prepared from sources believed reliable but is not guaranteed by us as to its timeliness or accuracy, and is not a complete summary or statement of all available data. This piece is intended solely for our clients and prospective clients and is for informational purposes only. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. The companies written in bold-face are stocks currently held by Brown Advisory strategies. The STOXX® Europe 600 Index is derived from the STOXX® Europe Total Market Index (TMI) and is a subset of the STOXX® Global 1800 Index. With a fixed number of 600 components, the STOXX® Europe 600 Index represents large-, mid- and small-capitalization companies across 18 countries of the European region: Austria, Belgium, Czech Republic, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Norway, Portugal, Spain, Sweden, Switzerland and the United Kingdom. One cannot invest directly in an Index. Terms and definitions: Price-Earnings Ratio (P/E Ratio) and Price-to-Book Value Ratio are ratios of the price per share of a company’s stock compared to its per-share earnings and book value, respectively.