Extraordinarily low borrowing costs are hiding the weak business models of European firms relying on continued public spending, according to Schroders' head of global equities Virginie Maisonneuve.
The prospect of an interest rate hike in the coming years is the biggest risk for businesses that have relied on cheap funding, according to Maisonneuve who has positioned the Schroder ISF Global Equity Alpha fund with an underweight in the utilities, and materials accordingly.
A withdrawal of public spending would further see a widening growth gap in earnings between firms.
'The allocation of cheap money through low interest rates means that we have a misallocation of capital and an element of abnormality in stock valuations,' Maisonneuve told Citywire Global.
'I don't want to be in industries where public spending and policy is sustaining jobs. This means utilities, to some extent materials but actually it's across all sectors.'
As debt-burdened governments struggle to reduce spending and rather embark on lose monetary policy, Pimco's Bill Gross last week also warned of the impact of purchases of 'paper' shares as opposed to investments in 'tangible productive investment assets'.
Maisonneuve said that she did not expect a sharp divergence between stock performance in the next twelve months but that she was already positioning her fund to accomodate an anticipated rise in rates.
'I'd only be expecting rates in Europe and US to start rising from 2015 but its more about the anticipation of this which could start to move stock valuations this year.'
'For good companies, the prospect of a (rate) hike would enhance their value over the next few years. But there are other companies, linked to national services in Europe, that would otherwise be bankrupt.'
At the December meeting, the US central bank pledged to keep interest rates at near-zero levels in line with unemployment and inflation targets. Following a decision to keep rates unchanged at the ECB earlier in the month.
The fund, with just under €1 billion in assets under management, has its biggest stock overweights in technology companies Idea Cellar, Samsung Electronics, Infineon Technologies and Check Point Software Technologies.
Mainsonneuve returned 32.9% through her portfolio of global equity funds in the last three years to the end of November. The average return in the equity global sector was 23.7% over the same period.