Why the ‘value’ shift favours Europe

What lessons have you learned from 2016?

Markets are one long enduring learning curve. If a fund manager thinks they have nothing left to learn, then they’re finished, because the market loves to humble. And I think 2016 has been a humbling year for a lot of managers. One or two of our peer group have said exactly the same, that this has been the toughest year I have known. One of the factors that has made it so tough has been the rotation – it’s been a traders’ market. The rotation has been violent because of positioning. The big lesson I learned in 2016 is ‘maybe you didn’t look at positioning enough’. First we had the rally in energy, then mining; two areas that many people had found easy to avoid for a number of years. And more recently in the US we had ‘the big one’, and thankfully this we did manage to be on the right side of. It’s unusual for us to like the banking sector, but we managed to pre-position for that. And that was through applying the lesson we learned about positioning.

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

I think the key influences going into 2017 will be whether we’re right on equities moving from a growth to value market on a global basis. It’s been a one-way growth market since the financial crisis – you haven’t wanted to be in value. I’m not a great fan of those labels (growth versus value), as these things are in the eye of the beholder. But I do think that we are running out of road on quantitative easing – central bankers know this – and that will shape markets. I therefore believe we have touched the lows on bond yields globally, and the valuation high water mark for bond proxies – stocks that have been ‘oh-so-comfortable’ to be in. In October and November it became very uncomfortable to be in those stocks, and I think this is a move that has only just begun. To be right on that, I’ve got to be right on one thing; that deflation doesn’t win, and that therefore bond yields have got further to go up (or certainly not going down). If deflation wins, and bond yields go further down, that view is wrong, you don’t want to be in value, you want to be in so-called ‘quality growth’. I believe that view is not wrong and you don’t want to be in quality growth. That’s been the last decade, I don’t think it’s the next decade.

What are your highest conviction positions moving towards the new year?

I think if you have ‘high conviction’ at the end of 2016 you’re a strange person, or you’ve got a stronger constitution than I have. I’ve always said, be aware of the fund manager who’s got high conviction on everything at all times – that’s quite a dangerous beast in my view. A dose of humility and neurosis is always welcome.

So, I go into 2017 shaken by some of the events of 2016. But where I do have conviction is in the view that we are moving from a growth to a value market. One of the reasons I don’t describe my view as ‘high conviction’ is not just because of the events of 2016 and how tough it has been for active managers, but because the most important sector as we move into 2017 is something I have not liked for the past decade – financials.

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

There’s a whole interplay of things. I think currency is important. If we get a strong dollar it is usually good for European equities, and less good for emerging market equities. If I’m right that we’re moving from a growth to value market, I think this can knock on the head US equity outperformance versus other parts of the world. The value markets of the world are more Europe and Japan than they are the US, just by the nature of indices. So I think there might be an asset allocation shift to come. The thing that holds me back from having ‘high conviction’ is that the political upheavals that we’ve seen – Brexit, Trump – are moving now to Europe, and that will be a whole lot trickier as it’s not one nation, it’s a currency bloc. I think you could easily see the wobbles come back on the periphery in the form of the euro, and that political risk holds me back from saying that relative to the US, Europe is now a ‘buy’. But, we will get through that political risk, and that is what might create the opportunity to buy Europe. European equities have seen big outflows this last year, and this gives me much more optimism. I went into 2016 not a bull, I end 2016 more bullish.