Growing inflation could kick-start opportunities in Europe's undervalued telecommunications industry, according to Citywire AA-rated James Sym.
In an investor update, Sym, who runs several funds at Schroders including the Schroder ISF European Alpha Focus fund, said improvements in technology was forcing investment in the sector.
'The sector was out of favour in 2016 and was the worst performer in the European market as investors mistakenly conflated telcos with bond proxies. As a result, valuations are inexpensive and the sector is far from being over-owned,' Sym said.
'After a period of intense competition between telco operators, we are now seeing ongoing market repair in many European countries.
'This is taking place with tacit government and regulatory acceptance, as incumbents need to invest in fibre and 5G mobile networks. Crucially, we think this investment in fibre and 5G will be adequately remunerated.'
Telecommunications make up 11% of the fund, which is overweight against the benchmark of 4.1% and the fourth biggest sector allocation in the fund.
The largest company in this sector Sym holds is French telecoms company Orange at 5.2%, while he also holds 3.3% in German telecommunications company Drillisch.
Speaking in October 2016, Sym said there would be a great rotation in the European market and inflation would return. He said UK inflation is currently at 1.8%, close to the Bank of England’s target of 2%, and eurozone inflation was at similar levels.
'There is evidence that this pick-up in inflation is becoming embedded and is not just the commodity-driven spike that many commentators expect.
'As evidence of this, we note that recently companies from a broad range of industries (e.g. tyres, food and cement) have been talking about increasing prices to end customers in order to protect earnings,’ he said.
The largest sector in the fund is financials at 29.8%, with the second largest holding being loan company Aurelius Equity Opportunities at 5.0%.
Sym said the industry has benefitted from the rise in inflation, leading to fewer opportunities for value investors.
'Signs that inflation is coming back are fantastic for financials. Bank share prices have already seen significant gains in the latter half of 2016.
'Following this period of strong performance, we feel that the outsized valuation opportunity in banks has diminished, although there is certainly still scope for substantial profit improvements,' Sym said.
'Within financials generally we particularly like insurance stocks. Insurers remain decent value and are less volatile than banks. They are also a clear reflation beneficiary, as this enables them to invest their income into bonds at higher yields.'
Over three years to the end of January 2017 the Schroder ISF European Equity fund returned 14.24% in euro terms. This compare to a rise of 22.56% by its Citywire-assigned benchmark, the FTSE World Europe TR EUR, over the same time frame.
However, Sym has managed the fund since February 2016. Since this date, the fund has returned 20.13% while the benchmark rose 9.65%.