Buying opportunities in Europe, January 2023
European stock markets have enjoyed a decent start to 2023, with growing confidence that the coming year may be better than expected.
The optimistic air has been partly fuelled by falling natural gas prices easing eurozone inflation worries and the relaxing of China’s strict Covid-related policies.
But how are managers of European funds feeling about the immediate future? Are they expecting share prices to rise – or are there threats on the horizon?
Here, we look at the key economic factors influencing five such portfolios, along with the stocks and sectors that have caught their managers’ eyes.
Braced for recession
According to Rob Burnett, who has managed the LF Lightman European fund for almost four years, investors are braced for recession, but earnings may prove resilient. “Whilst some European countries may be in a shallow recession, a global recession does not appear imminent in the short term,” he said.
He believes the major risk to markets isn’t a sharp drop in earnings, but the over-valuation of certain securities. Markets, he believes, haven’t adjusted to a world of higher inflation and interest rates.
He favours companies that can expand dividends and share buy-backs. “We avoid expensive securities,” he added. “This strategy has helped the fund successfully navigate complex markets in recent years and we believe this can continue in 2023.”
The fund generally has a concentrated portfolio of 40-50 holdings, with the manager favouring undervalued companies with positive operational momentum. CaixaBank, a Spanish financial services company, is currently the largest stock position with a 5% share of assets under management*. Financials, meanwhile, is the most favoured sector*.
Buying opportunities
The coming year could present a profound buying opportunity in European equities, according to John Bennett, manager of the Janus Henderson European Focus fund. “In our opinion, the stock market lows are behind us while valuations seem to be at attractive levels and sell- side consensus earnings downgrades are coming through,” he said.
Although John expects the first quarter of the year could be turbulent, he believes relief rallies may follow upcoming profit warnings as bad news has already been priced in.
“We will look to the industrial and capital goods sectors, where it seems evident that companies have been producing for inventory and are ratcheting down, for evidence of this,” he added.
The fund aims to capture performance by anticipating the catalysts for change in European companies and industries. As far as country exposure is concerned, the fund is 30.57% invested in France, with 15.50% in the Netherlands, 13.84% in Germany, and 10.97% in Switzerland*. Industrials is the most prominent sector at the moment with a 19.44% share of assets, followed by 15.40% in health care and 14.71% invested in financials*.
Attractive valuations
Looking ahead, Niall Gallagher, manager of the GAM Star Continental European Equity fund, is positive on the outlook, despite the lingering negativity of some observers. “Valuations are attractive in absolute terms, very attractive relative to the US and some of the broader macro trends are coming back into favour to allow for a period of what we believe will be decent earnings growth and some sustained performance from the asset class,” he said.
He also pointed out this was happening at a time when sentiment towards European equities is still negative and asset allocations are at a record low.
The aim of the fund is to deliver attractive, risk-adjusted returns by investing in a concentrated portfolio of 30-40 large companies. Nestlé, the Swiss food and drink conglomerate, is currently the biggest stock holding in the portfolio with a 5.73% share of assets under management*. TotalEnergies, Novo Nordisk, Pernod Ricard, Shell and LVMH Moet Hennessy Louis Vuitton are also currently among the fund’s 10 largest positions*.
Volatility still expected
Zehrid Osmani, lead manager of the FTF Martin Currie European Unconstrained fund, believes monetary policies will determine equity market direction. “Given ongoing uncertainty around inflation trends and monetary policies, we expect volatility between growth and value styles to remain elevated,” he said.
The fund provides a focused, high conviction portfolio of quality growth companies. According to the most recent fact sheet, these include Italian supercar manufacturer Ferrari and L’Oreal, the French personal care company with a global customer base*.
Looking ahead, Zed believes a stabilisation in interest-rate expectations and anticipation of the end to the hiking cycle may be enough to help bolster equity markets. “With equity markets having sold off significantly during 2022, we believe equity valuations are now more supportive in European equity markets,” he said. “On a relative basis, for developed markets, we see more valuation support in European equity markets versus the US growth themes.”
Quality always comes first
The managers of the Comgest Growth Europe ex UK fund – Arnaud Cosserat, Alistair Wittet and Franz Weis – focuses attention on companies and not mega trends. Quality, they insist, comes first. It’s an approach they believe will help protect the portfolio in the event of a recession this year.
“Valuations may continue to compress should inflation remain stubbornly high, but as long as the companies deliver on the growth we expect, we believe the performance headwind should be short lived,” they said.
The trio also remain focused on the long term and believe the next decade will be defined by the need to transition to a green economy. “Heineken estimates the cost of not transitioning at €2.4bn, making it not just right, but economic too,” they added. “ We believe this will create opportunities for those who can be solution providers, such as Sika and Kingspan in the construction space.”
*Source: fund factsheet, 31 December 2022
Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. The views expressed are those of the author and fund managers and do not constitute financial advice.