From Brexit to the rise of populist politics and increased ECB imposition, European equity left many asset allocators scratching their heads in 2016.
As our Selector Snapshot series has shown, some even took decisive action to ditch large allocations here, but is it time to cut your losses or hunker down and find new ways to deal with anticipated hardships ahead?
Citywire Selector spoke to two leading French fund selectors to find out.
Lucas Strojny, Advenis (France)
Despite attractive valuations and resilient domestic demand, European equity markets were disappointing compared with North American or emerging market performance in 2016, partially because of the Brexit burden. There are important lessons to be learnt from the misinterpretation of Brexit by the investment consensus.
Above all, it is not evident that the fragmentation of the EU would be an economic and financial calamity. Contrary to expectations, the referendum result has lowered the uncertainty as the different steps of the process are known, as well as the possible outcomes.
The Brexit fiasco brought volatility to the market but it also confirms that the consequences of event risks of this kind are difficult to evaluate. We think the outlook is still positive for Europe, as global growth is not weakening and remains driven by domestic demand. Monetary policies are likely to remain accommodative both in the UK and in the eurozone.
In this respect, the company results set for release this quarter will be especially significant and we expect confirmation that the recovery from the global profit recession has begun, including for financials. The Italian referendum will probably bring some volatility to the market but Europe has proven its strength during the last few years. We have now reduced our US equity overweight in favour of European equity and have developed two main themes in our European equity buckets.
Firstly, we have initiated a small-cap exposure through William Sharp’s newly launched AIM Europe Smallcaps fund, in order to benefit from the European recovery. We intend to increase this theme and are actively monitoring the Pluvalca France Small Caps fund.
Secondly, we have increased our long/short equity exposure to benefit from the dispersion caused by the series of political events in Europe. For example, we took a significant position in the Henderson Gartmore UK Absolute Return fund a few days prior to the Brexit vote.
Frédéric Cohen, OFI AM
When it comes to European markets, every day we ask ourselves whether investors should get accustomed to this slow, rough and technocratic organisation, or simply accept we are facing the beginning of a eurozone breakup? One thing is certain: Europe has, and deserves, a risk premium until things get clearer. However, this premium is not uniform among sectors.
Indeed, the valuation dispersion between cheap and expensive stocks has seldom been so high. On the one hand, ‘stable/growth’ companies, considered as bond proxies, are trading at a historical high, when 40% of all OECD government bonds are trading at negative yields. On the other hand, some cyclical and financial companies are trading at or below 2008 levels, despite being restructured.
At a time when most investors, clients and managers are looking in the rear-view mirror and emphasising short-term performance, we think investors should consider a longer-term view and eventually accept more volatility, but not necessarily more risk, by investing in value funds.
The European risk premium is, to a large extent, already priced into cheap sectors, whether growth stocks are priced for a low growth and low rate environment forever. The risk-return profile of each style clearly favours the former.
What makes us comfortable as well, is the disappearance of value funds. To survive, traditional value funds had to adapt and switch from a pure valuation approach to a GARP one. So, it’s been a pretty difficult task to find appropriate strategies that reflect our fundamental view because very few portfolio managers are able to take large contrarian views.
Those that do are usually small, opportunistic firms such as Neptune, where we are invested in Rob Burnett’s Neptune European Opportunities fund. However, some larger firms also have a culture of conviction such as Rothschild & Cie and Invesco, where we own Jeffrey Taylor’s fund.
These comments originally appeared as part of a supplement published in November 2016.