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Citywire-rated trio: why Europe is still intact

Citywire-rated trio: why Europe is still intact

Europe has faced a variety of political headwinds ove the past year. From Brexit to Catalonian tensions, it’s been a tough time for many investors in the European space.

With the election fervour having calmed, Catalan is now front and centre but rated managers believe the Spanish constitutional concerns will be quelled.

BlueBay’s Mark Dowding said there isn’t a realistic path to a ‘Catalexit’, with an eventual outcome likely to lead to increased autonomy for Catalonia.

'It should be emphasised that the Spanish constitution does not allow for independence referendums to take place,' he said.

AAA-rated Dowding (pictured below), who runs the BlueBay Investment Grade Euro Aggregate Bond fund, among others, said other Spanish regions wish to remain in the Spain’s union.

‘Nationalistic passions have always been strong in Pais Vasco, but the region remains within the union of Spain – albeit enjoying increased autonomy and control over fiscal revenues than is enjoyed by the other Spanish regions.

‘Over time we expect Catalonia to win a similar deal, but to stop short of full independence, which could see the region voting to leave the EU, which would make Brexit look like a walk in the park.’

Plenty of potential

Elsewhere, PineBridge’s Graeme Bencke, who manages the Global Focus Equity fund, said his team still has a lot of conviction in support of broader European growth despite specific challenges.

‘Moves towards greater integration at the fiscal level are increasingly likely following the UK’s Brexit decision, as well as the new terms of government in Germany and France for parties which openly want to move in that direction’, he told Citywire Selector.

AA-rated Bencke (pictured below) currently has around 29% of the fund allocated to Europe including the UK.

He said the team has a clear preference in Southern Europe for Spain (2.9%), where he said the economic recovery is still offering plenty of potential.

'Loan growth, credit quality, employment and the housing market are all trending in the right direction and are far from historic cyclical peaks.

'Clearly, the recent heightened tension in Catalonia may have a near-term impact, but with a sensible response from the Spanish government it does not need to escalate significantly in my view,' he added.

News reaction

Despite the noise surrounding politics, Russel Investments’ Ronnie Sabel said investors need to look beyond whether the news flow is good or bad, but also whether the market has over or underreacted as a result.

‘The uncertainty around the Catalan situation is likely to hit business sentiment. Catalonia accounts for around 19% of Spanish GDP, has a lower jobless rate, and represents a quarter of exports.

'Furthermore, while uncertainty lingers, businesses may hold back on investment and consumers may be more cautious, but this is unlikely to cause the rest of Spain to slow.

‘We do not anticipate sharp and sustained falls in Spanish markets, and we have seen some modest divergence between the Spanish stock market and broader Europe as news flow ebbs and flows.

'This has created some moderate investment opportunities, and could continue to do so, but the reactions have not been large so far,' he said.

Citywire + rated Sabel (pictured below) currently has modest underweights to Spain and Italy in the Russell Investments Pan European Equity fund.

He said it should be noted that Europe has faced many geopolitical headwinds throughout 2017 and has remained strong.

'Notably Brexit and several European elections, in addition to the flow-on effect of the tensions between the US and North Korea.

'Despite this, pan-European markets have provided double digit returns year-to-date as strong corporate performance has resulted in strong earnings results, while valuations remain relatively attractive.’

'However, the 2018 Italian elections are one to keep an eye on because of the increased risks of a populist, euro sceptic government taking power,' he added.

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