Pease: Euro debt riskier than many equities

Richard Pease, manager of the Henderson European Growth and European Special Situations funds, believes stocks on the Continent can flourish despite the sovereign debt concerns.

The European Union may have bought a little time but I believe that further intervention will probably be needed in 2011 if sovereign debt contagion is to be contained.

The market is clearly unconvinced that the structural problems are resolved when yields on government debt in the eurozone range from 3% in Germany to nearer 12% in Greece. In fact, Irish and Greek 10-year government bond holders have seen their bonds lose about a quarter of their value in 2010, compared to modest positive returns from European equities. Interestingly, we enter 2011 with government debt looking poorer value and arguably riskier than some European equities.

For those core European countries where government bonds have escaped the ravages of 2010 one needs a lot of faith in low inflation to accept a 3% per annum income from 10-year German government bonds.

There are plenty of quality German companies such as Fielmann, the optometrist/spectacles retailer, which yield more and have the potential for dividends to grow over time.

Clearly, there are risks to capital by investing in equities, but investors can build in a degree of insurance by buying well-managed companies with good business models and strong cash flows.

The turmoil in the sovereign debt markets has held back the advance of European equities compared to several other markets in 2010, so from a valuation perspective I believe European equities have the potential to perform surprisingly well in 2011 as this somewhat overlooked market recoups investor interest.