European equity veteran Franz Weis has become the latest sector stalwart to question the merits and reality of a large-scale recovery in the region.
Weis, who works for French group Comgest, made the comments during his mid-year review for the €2.02 billion Comgest Growth Europe Euro fund.
The Paris-based manager said, despite positivity among investors, the size of a QE-led rally in Europe may already have been absorbed by markets and cautioned against over optimism here.
In his update, Weis said he was not cautiously optimistic but highly selectively optimistic.
‘Selectivity will be extremely important in the coming quarters. Many commentators and experts say the economy is improving and accept ever higher multiples on valuations and investment risks,’ he said.
‘The argument goes that if there is an economic recovery, then company sales will accelerate and the companies will also benefit from some operational leverage, meaning their margins will bounce back and resulting strong earnings growth justifies higher P/E multiples for the market.’
‘It is important to keep in my mind that while there is an acceleration in growth, that growth may stay relatively moderate. And, secondly, neither the European company nor the sales nor margins are at trough levels, so any acceleration we see cannot be compared with a typical cyclical recovery.’
No new additions
In the Comgest Growth Europe Euro fund, which he co-runs with Laurent Dobler and Arnaud Cosserat, Weis said he has made no new stock additions since the start of the year but added to existing holdings.
This includes upping exposure to Danish medical devices company Coloplast, despite severe headwinds facing the firm. This saw the company reduce its sales growth and margin guidance for the year.
‘The reasons are some short term volatility in its UK subsidiary and a small regulatory fine in the US but in our view Coloplast remains a high quality company with undiminished long-term growth prospects.’
‘This year, even after the profit warning, the company still expects a 7% organic sales growth and a 32% operating margin. Also its valuation has become much valuation again, which is why we have in this case increased our position.’
Elsewhere, the team sold out of positions in UK inspections company Intertek and Swedish medical group Elekta, as well as removing Dutch group Core Laboratories, which specialises in fluid analysis for the petroleum industry.
Weis said the removal of Core Labs, as it is known, as due to an underestimation of how it would be affected by the huge sell-off in the US shale market.
The Comgest Growth Europe Euro fund returned 59.5% in euro terms over the three years to the end of July 2015. This compares to a rise of 63.8% by its Citywire-assigned benchmark, the FTSE World Europe TR EUR, over the same period.