Cazenove’s Rice on the ‘arms race’ for Nestlé

Cazenove’s European fund manager, Chris Rice, said there has been an effective “arms race” among investors to buy into defensive companies such as Nestlé amid the recent sell-off.

Rice is one of the top performers in the sector over the long term, who has run the £869m European fund since 2002. He said investors have flocked to the food giant in recent months, but he has now moved underweight the stock after its price soared.

“There has been an arms race to get as much Nestlé as possible into your portfolio. It is now on a trend P/E of 18 times, which is more than twice the market P/E of 7.7 times,” he said.

“A few weeks ago we went underweight the stock, and we are also underweight the food producers for the first time since 2004, as they are on huge P/Es now.”

Instead Rice has been moving the portfolio into areas which are starkly out of favour, such as financials, buying Deutsche Bank and adding to his position in French bank BNP Paribas.

“We bought Deutsche Bank and insurance stocks, and we also have a bit of BNP which we have added to. We need to take advantage of the market’s fear.”

The only thing holding Rice back from becoming bullish on equities in the short term is the risk of a policy error by politicians, or a panic move by companies.

“Two things could make this crisis worse – a huge policy mistake or a self-fulfilling corporate collapse where companies downsize, cut costs, and cut jobs and spending,” he said.

“It is therefore difficult to be bullish on equities in the short term as those two things could cause a much more violent downswing, but on a longer-term view they are so low it looks like an attractive entry point.”

While Rice’s portfolio had been invested predominantly in the ‘secure growth’ sector, which includes Nestlé, he said overvaluations led him to move more heavily into large caps, and these now make up 40% of the portfolio.

“European equities have fallen 25%-30% and this has driven us all towards secure growth stocks, but now we face a really extreme valuation dispersion in equities,” he said.

“The price of safety is getting very high now. We fear the dispersion is becoming too extreme too ignore the value signal, and secure growth now looks completely unattractive,” he said.

“Where we are really bullish now is actually the large-cap space, as it looks great relative to history following the sell-off. It also acts as a better inflation hedge than other assets such as gold because the companies have pricing power, while they are already priced for deflation.”