Momentum in Europe

We think now is a good time to be investing in Europe. European equity valuations are at the lowest level in more than 40 years, by some measures, and we are seeing green shoots in the region’s downtrodden economy. Meanwhile, European companies in several industries have right-sized their cost structures or refocused their businesses, setting them up to be more competitive on a global scale.

In some cases, these structural changes remain unrecognized by the market, creating some of the best long-term investment opportunities we’ve seen from the region in years, in our view.

Second-quarter GDP growth for the euro zone – the first economic expansion for the region since the third quarter of 2011 – grabbed attention in August, but we had seen signs for several months that Europe’s economy was improving.

New orders outpaced inventory buildup since last September. The ratio of new orders to inventories moved up considerably from May to July. When that ratio trends up, positive earnings revisions typically follow.

We see improvements in some of the most important industries in Europe’s economy as well. Earlier this year, European auto sales in terms of numbers of units fell two standard deviations below its long-term mean. We believed that marked a tipping point because U.S. auto sales hit that same low-water mark before rebounding sharply in 2009. By late spring, companies supplying parts to Europe’s auto manufacturers noted a pickup in orders, and we since have seen auto sales turn positive in some of Europe’s largest countries.

A rebound in the auto industry would go a long way toward getting the region back on its feet. In Germany, which still drives the bus when it comes to the European economy, we estimate that 12% of the country’s GDP is tied to the auto manufacturing chain.

Meanwhile, much of the economic activity that drives bank earnings also has reached an inflection point. For instance, loan growth reached its trough, nonperforming loans peaked, and banks largely have completed asset write-downs.

Stock valuations don’t reflect the economic improvements we are seeing, however. European equities are undervalued and trading at a deep discount to U.S. stocks. While European equities are appealing in general, we think there are specific areas of the market that are particularly attractive.

In the industrials and financials sector, we think the market is overlooking structural changes taking place at a number of companies that could mean substantial improvements to the bottom line of these companies for the next decade or longer.

Over half the industrials companies covered by our European industrials analyst are restructuring. Management teams are getting the upper hand in bargaining with unions, as many unions realize they must make stronger concessions to survive. Even in France, which has some of Europe’s most aggressive unions, we’ve seen the unions back down. Other companies are shedding business units that were unprofitable.

European banks offer another attractive investment opportunity. Most of these banks are trading well below their historical levels and the valuations of banks in the U.S. and Asia. We think the market is underestimating some of the cost-cutting measures taking place at these companies.

Part of the reason the market is underestimating cost cuts is that they are often behind the scene and difficult to measure. For instance, banks are sensitive to publicizing layoffs, but one of our analysts in Europe has noticed a number of staff reductions and other small cuts taking place in various departments.

Measuring the sum of all these parts is difficult, so investors have been skeptical that the cuts will really take place. But in general, banks have delivered on cost-cutting guidance ahead of schedule, and sometimes beyond managements’ initial estimates, increasing our conviction that future cuts can be carried out.

We by no means expect a V-shaped recovery in Europe, but as companies right-size their cost structures, it should substantially improve margins if the economy improves even modestly. We see early signs of those improvements, making it an opportune time to invest in Europe.

Please consider the charges, risks, expenses and investment objectives carefully before investing. For a prospectus or, if available, a summary prospectus containing this and other information, please call Janus at 877.33JANUS (52687) or download the file from Read it carefully before you invest or send money.

Investing involves market risk. Investment return and value will fluctuate, and it is possible to lose money by investing.

Foreign securities have additional risks including exchange rate changes, political and economic upheaval, the relative lack of information, relatively low market liquidity and the potential lack of strict financial and accounting controls and standards. These risks are magnified in emerging markets. The prices of foreign securities held by the fund, and therefore a fund's performance, may decline in response to such risks.

The views expressed are those of Janus research analysts. They do not necessarily reflect the views of Janus portfolio managers or other persons in Janus’ organization. These views are subject to change at any time based on market and other conditions, and Janus disclaims any responsibility to update such views. No forecasts can be guaranteed. These views may not be relied upon as investment advice or as an indication of trading intent on behalf of any Janus fund.

In preparing this document, Janus has relied upon and assumed, without independent verification, the accuracy and completeness of all

information available from public sources.

Statements in this piece that reflect pr o jections or expectations of future financial or economic performance of the markets in general are

forward-looking statements. Actual results or events may differ materially from those projected, estimated, assumed or anticipated in any such forward-looking statements. Important factors that could result in such differences, in addition to the other factors noted with such forward-looking statements, include general economic conditions such as inflation, recession and interest rates.

Investment products offered are: NOT FDIC-INSURED. MAY LOSE VALUE. NO BANK GUARANTEE.

Janus Distributors LLC (09/13)


151 Detroit Street, Denver, CO 80206 I 800.668.0434 I

C-0913-45227 09-30-14

188-15-26155 09-13

© Janus Capital Group

© Janus Henderson Investors

Read more commentaries by Janus Henderson Investors