European value: political uncertainty affords opportunity

What lessons have you learned from 2016?

This is a difficult question to answer as 2016 has been a very “emotive” year, both in terms of events and news. On the whole, European companies have done reasonably well in 2016, with some exceptions. Nonetheless, we have been witness to significant sector rotation, as well as style correlation, across markets. A lot of this tension has been driven by political uncertainty, both within Europe and without. Broadly speaking we would always advocate stopping to think before acting. This has been particularly important this year with markets often driven by sentiment, rather than logic or data. We also do not trust politicians to think long term when framing policy (sadly principle often also appears to be lacking) – they work to the electoral cycle and don’t want to be unemployed!

What are the key themes likely to shape the markets in which you invest in 2017?

A number of elections are due to take place in Europe during 2017, against a background of populist unrest. Given the examples set by the UK’s EU referendum result and Trump’s ‘against the odds’ victory in the US presidential election, the expectation is that this will probably give rise to increased volatility, even if this proves short-lived. Bond markets may also weaken which, if severe, could cause problems for equity markets. We could also see austerity measures reduce and potentially reverse as European politicians take note of unrest elsewhere.

We expect the UK to suffer versus the eurozone in a post-Brexit world, with a transfer of high margin and knowledge-based jobs across the English Channel, although this is probably more of a long-term trend.

What are your highest conviction positions moving towards the New Year?

We have, for a long time, operated in an environment where investors have favoured quality European stocks ‘at any cost’ over the alternatives. If the mood music changes, we may see economic recovery coupled with stimulative government measures, as a consequence bond yields may move out. In this environment, value stocks, relative to others should finally have their day in the sun.

We look for pricing dislocations when building our portfolios, with our highest conviction positions all taken at a stock, rather than sector, level.

What should investors expect from your asset class and your portfolio(s) going forward?

Given the political timetable across Europe over the next 12 months it is difficult to forecast short-term returns. However, based on the current price of European stocks in aggregate, and Euroland in particular, history suggests that above average returns normally follow. Regardless, my portfolio will continue to be shaped by good quality companies – typically those with high barriers to entry, good margins, high cash flows, but with P/E multiples below that of the market. Investors are always moving between greed and fear at the individual stock level, which affords opportunities.