English Corner04.09.2017
We are constructive on European large cap equities

Ken Hsia, Portfolio Manager Investec European Equity Fund

Although the risk of an economic shock or slowdown remains, Ken Hsia, Portfolio Manager at Investec Asset Management reassures: "EUrope is home to many innovative companies in positions of stregth in their market niches.

What is your view on European large cap equities for the remainder of 2017?  Where will the opportunities and challenges come from?
We are constructive. The improving earnings trajectory we have seen in Europe since the start of this year is becoming entrenched, helped by industrial demand and signs of improving employment and consumer spending in southern European countries that have lagged so far. Cyclical recovery in sectors such as construction is still in the early stages across Europe, looking back at historical activity levels, meaning that there is headroom for further earnings improvement. More broadly, constraints on capex in recent years mean that pricing power is emerging in some subsectors where demand growth is exceeding supply (such as parts of the speciality chemicals sector). 

In terms of risks, the strengthening of the trade-weighted euro, reflects improving macro conditions in Europe as well as expectations around the tapering of QE, is a risk in sectors such as luxury goods that must rely on their pricing power to balance the impact; in most sectors the headwind is limited to the translation of overseas earnings. Specifically within the UK, the uncertainty created by Brexit and the impact on household disposable income from rising inflation could dampen discretionary spending at the lower end of the market.  However, from a portfolio perspective these effects are manageable. 

What key bets and themes are you especially interested in now and for the remainder of 2017?
The gradual move towards a normalisation of interest rates creates a tailwind for the financials sector, particularly the more rate-sensitive banks. Combined with the recapitalisation of the troubled end of the Spanish and Italian banking systems; regulators that are easing the ability of banks to clean up their balance sheets; and an improved market structure in Spain should continue to open up opportunities. 

Within the materials sector, in our view, some European mining companies are currently pricing in long-term commodity prices below the natural supply-demand equilibrium point. The shift towards electric cars, for example, will drive copper and aluminium demand as well as more niche materials such as cobalt. Additionally, management teams have been changed where their mandates are to channel better the current strong cashflows between shareholder returns and growth.

Are there any major risks or bright-spots beyond 2017 - what are they?
The main risk remains an economic shock or slowdown, since we are reliant on earnings growth to underpin company valuations.  We are also aware that after a period of re-rating as yield has been scarce, rising rates could gradually pressure valuations in some defensive sectors. More positively, we continue to seek out pockets of earnings growth – it is important to remember that as well as the household mega-cap names, Europe is home to many innovative companies in positions of strength in their market niches.

Autor: mab

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