This week’s panel debates the experience of investors in the European equities sector
In the second part of Investment Week’s debate which took place on 10 December 2009, the panel discusses the experience of investors in the European equities sector. S&P analyst Peter Fuller, Nick Williams head of the Pan European small- and mid-cap equities team at Baring Asset Management and Mark Page head of European Equities at LV= Asset Management answer the questions.
Within the core European countries, industrial orders fell in October which was unexpected, is this cause for concern?
Mark Page (MP): We think that number is probably a one-off. It is a cause for concern but has it caused us to change any of our holdings? No. Not at all. An alarm bell has been rung in the background, but it has not changed our view yet. With a series of numbers like that, then yes, of course we would change our view.
Peter Fuller (PF): I would agree. Information coming out of the government domain is political. And analysts are always very effervescent in both directions. I think it was good to hear that news. It has brought the dip in the market and a buying opportunity.
Nick Williams (NW): My view is that it is not especially important. The fact is that data does not always point in the same direction, you are not going to get a clear set of instructions from the economic data to tell you exactly what you are going to have to go out and buy. There is a degree of interpretation.
We are not expecting a fantastic economic recovery in 2010. We are not looking for GDP growth of anything more than about 2% for the euro zone in 2010.
One or two mildly disappointing pieces of economic data on the way up are to be expected. It should not take away from the fact the German economy actually grew quarter on quarter in Q2 of 2009.
Indications are that in the fourth quarter of 2009, we are going to see a lot more positive year-on-year growth rates compared to Q4 of 2008. As long as the American economy continues to show signs of recovery, hopefully Europe will also produce a muted recovery in 2010.
There have been positive inflows into European funds of late at a time when some sectors are suffering outflows. To what do you attribute this bolstered enthusiasm?
MP: The areas that have outperformed recently have been the emerging markets and particularly Asia ex Japan. So, people are saying they have done very well out of that and want to know where to look next especially given the fuller valuations for equities in these regions.
Europe is the next obvious place to look to. It provides a bit of currency and industry diversification if you are UK based and exposure to emerging market growth for a more reasonable price tag. So I think it is a more natural rotation towards Europe..
NW: Europe merits the increased attention, partly because you are not going to get much of a return out of the cash you are holding at the moment.
Secondly, the valuations on offer, despite the run we have seen in European equities in 2009, are really still quite attractive for this stage in the cycle. They do not appear to be integrating significant earnings recovery, or indeed as much earnings recovery as would be normal in an economic upturn. For those reasons, I think the inflows are justified and, frankly, would hope for more.
PF: I think there might be more money. A figure was quoted to me the other day that E70bn had flowed into European mutual funds in Q3. There is still an awful lot more institutional money to come. From what we can see at the moment, institutions are probably still slightly underweight Europe, and if that money just trickled into the market it will almost certainly go to the core markets. While not expecting a major rise through it, managers think it could sustain the current levels.
What do you see as the biggest threat to European equities over this coming year?
NW: You have to be scared of the double dip after a very sharp inventory rebuild and the jury is still out about the level of genuine economic demand coming through in 2010. Governments are likely to keep interest rates low and to do everything they can to encourage economic recovery.
I don’t think central bankers want to turn off the taps and raise interest rates any time soon. They are concerned they will throw the world economy into a double dip and so will be avoiding raising rates for as long as possible.
PF: I would agree on interest rates. Modest inflation wouldn’t do any harm, it might even help get the lending figures down a bit.
The other concern is government. I am not sure how real the argument between the UK and Europe is, but the UK cannot hold itself up to be a good role model at the moment. I think if there is any waiver in Europe, governments may overplay their hand and panic. If they leave the market alone, I think it is slowly getting better.
MP: You have to be scared of a double dip. I think, as you have had the sharp inventory rebuild, governments are keeping interest rates low, to do everything they can to encourage that to transform itself into end demand.
Anything that upsets the apple cart has to be bad. So any panic, as Peter says, by government or any raising of interest rates too early is not going to be good news. But I cannot see those scenarios, I think they are pretty aware of the impact that would have.
What sectors do you like and dislike at present and why have you formed those particular views?
MP: Our portfolio is a mix of stock picks and sector themes. One of the sector themes we like is agriculture. The world’s population is growing and you have increased protein requirements from developing nations. We like that and are prepared to play a theme like that through the portfolio.
Bearing in mind financing is still difficult another theme that we are playing is small ticket items versus large ticket items. Clothes versus cars is an obvious thing to say. Although more recently some of the car stocks have benefitted from governments creating artificial end demand and have participated in the distressed balance sheet and risky asset rally of the last nine months.
We would rather own companies that stand on their own two feet and have more control over their own destiny rather than relying on some strong economic recovery to drive their earnings going forward.
The other thing I would be wary of is, certain governments are in trouble and will try and tax where they can. I would be a bit wary of more-traditional defensive sectors, they may turn out to be not quite so defensive as you thought.
NW: The great thing about smaller companies, which is my playing field, is you find niche and growth companies across all the sectors.
Despite my positive outlook on the markets as a whole, that doesn’t change the fact that overall growth is reasonably good value, compared to value stocks.
At the moment, we are primarily focused on the healthcare and technology sectors where we can find a number of European smaller companies that appear simply to have been overlooked.
They now look very good value compared to their longer term growth prospects. That is one area we are particularly keen on.
On a geographic basis, we have seen a shift in our portfolios which has effectively followed our bottom up ideas out of Scandinavia and towards the core of Europe over the last six months. To some extent, I would anticipate that would reverse going forward as Scandinavian countries have typically seen quite good earnings recoveries and have a lot of US dollar exposure, which is looking quite good value if you believe in an economic upturn.
PF: I agree. The market is focusing away from economy-sensitive stocks to those with transparency of earnings. But it is not the typical defensives, not the mega caps which people would normally expect at this point in the cycle. Investors are finding a lot of good quality growth stocks on attractive valuations. But at the moment, it tends to be in the core markets.
