Standard Life Investments

Through the Lens

Connecting People - can Europe follow Nokia's lead?

  • Europe's comeback?
  • Nokia – staying connected
  • Focusing on the fundamentals

A lot of column inches have been devoted to events in Europe in recent weeks. Firstly, we had speculation as to whether the ECB's €60 billion a month sugar rush would boost growth and stave off inflationary concerns. This was followed by a surprise move from the Swiss National Bank when it unpegged the franc from the euro, sending the franc soaring by almost 30% in the initial turmoil. UBS has subsequently revised Swiss growth for the year, down from 1.8% to 0.5%, while European skiers are anticipating feeling the pinch in their après ski. Athens has also brought a modern day Greek tragedy to centre stage as new prime minister, Alexis Tsipras, plays brinkmanship with the Troika.

Despite this, recovery in the near-term is looking promising. The banking system is more stable, lending is improving and the benefits of cheaper oil are starting to filter through to the consumer. However, the macro picture remains a movable target. The effects of QE in Europe are more nuanced than in the US or the UK where there is one political system. The political agendas of various member states and subsequent posturing could mean that trouble is being stored up for the future as not all countries are likely to pursue the reforms necessary to meaningfully lift the region from the doldrums.

The benefit for stock-pickers is that we can ignore the noise of markets and focus on the fundamentals.  One advantage of the cheaper euro has been the boost to global-oriented sectors such as technology, consumer staples and discretionary consumer spending. Within this space, one stock where we've experienced surprising gains is Nokia. For a company that was on its knees not that long ago, it has staged a remarkable turnaround post the disposal of its devices and services divisions. The focus on networks and monetisation opportunities in its advanced technologies (patents) operations continue to show improvement. Growth is coming from real business momentum and deals that drive growth. Gross margins are being improved by efficiency in R&D and services are being operated with good cost controls.

At long last there are a number of tailwinds for European equities, such as cheap valuations relative to other developed markets and the cheap euro. However, all of this remains a balancing act against a backdrop of Ukranian uncertainty, Sweden's sudden QE programme and negative interest rate move and other mixed newsflow. By looking for the drivers of change at a company level, we believe that that the vagaries of the macro environment can be mitigated. And in the case of companies such as Nokia, recognition of its debt refinancing and patent opportunities ahead of the consensus, we believe will help drive the stock towards the finish line.