In this video, John Bennett, Director of European Equities, discusses what he believes 2020 holds for the asset class.
- It is important to tune out the noise. In 2019, European equities provided a good return despite frequent negative narrative surrounding the region.
- John believes that while European returns might not be as strong this year as they were last year, 2020 may still be another positive year.
- A big question in 2020 is whether mainland Europe will experience fiscal expansion – a factor that impacts John's portfolios, which remain underweight financials.
How have your experiences in 2019 shifted your approach or outlook for 2020?
The reason I have talked a wee [little] bit about the investor sitting here at or around all-time highs. I talk about that a bit, not to say ”oh haven’t European equities done ever so well?” or “haven’t we done ever so well?” – not at all. It is more, in a sense, to juxtaposition that against the narrative. Between Christmas and New Year, because I am a very cheery person, I was reading an article by a UK investment periodical that actually had a headline reading something along the lines of ‘signs of hope for European equities’. Really? Has this been a bear market? Not at all. The last decade, in absolute terms (it definitely hadn’t matched US equities, and I guess the comment is relative), but looking over five, ten or more years, taking a reasonable timeframe, okay take one, it has been good* and yet the narrative remains gloom and doom and geopolitics.
I have said for the 30-odd years that I have been involved with this: ignore the geopolitical noise. There’s always loads of it. The other thing is, can we please accept that every single year, you may likely get at least a 10% correction in equities? It’s what they do. And, in other words, it is about staying the course.
What does 2020 hold for European equities?
And I guess that brings me back to the question that was asked about this year because everybody asks ‘so, what about this year’, and I find it mad actually. Nobody has got a clue about what is going to happen this year or next year. It is therefore guesswork. My guess is that in this US Presidential election year - and I look a wee bit at history and what tends to happen - I don’t think it is as strong as last year in 2019, I really don’t. I think if we make high single-digit returns to investors, that is going to be good. I don’t think it’s a down year but, what do I know, it might be. I’ve no idea where currencies are going to go so your 5%, 6%, 7%, 8% return could get wiped out by Sterling strength [relevant for sterling-based investors]. No idea. But I think we [could potentially] have another positive year. That being said, I think the easy money has been made.
I always start with a repetitive disclaimer that if the lead market (US equities) holds, ie doesn’t fall out of bed, I’ve been saying for the last year at least that European equities are going up and that has come to pass in 2019. But I go into 2020 saying the same - that if US equities don’t 'fall out of bed' [fall] by more than 20%, for whatever reason, and I factor into that the usual 10% correction which in my view is nothing, I think European equities are set fair to [potentially] go up.
What are the key themes for 2020?
Within that, I think there are one or two themes that investors should be thinking about. And I don’t mean at the stage of industry themes. There is a macro that I am thinking about and that is the question of fiscal expansion. And it’s a big question mark when it comes to Europe because Germany holds the purse strings tightly. I think the UK always was, and now is, the front runner for fiscal expansion and I think that with the new landslide Tory government in place you are going to see fiscal expansion in the UK. That may or may not have implications for the shape of the bond yield curve in the UK.
The bigger question for me as an investor in Europe is, could we see fiscal expansion in mainland Europe? It is still a big question. I think Germany probably needs it. Certainly, its roads and infrastructure needs it. And the reason it is a big question mark for me is frankly because I own no banks. Why are the two linked? Because if you were to get fiscal expansion in Europe, you probably would have a steepening, at last, of the yield curve and oxygen coming into the banking sector. This presents a risk for me because banks remain a big part of my benchmark.
So that might not be a thought in many investor's mind, but I think it should be. Certainly me, as a portfolio manager owning no banks and therefore at risk, in a relative performance sense, of underperforming should the banks ‘roof it’ [perform very well] on a change in the shape of the yield curve. What could change the shape of the yield curve, for me, is a big question going into 2020 – inflation expectations, and/or fiscal expansion, and I'm open minded about either.
*Referencing the MSCI Europe Index which returned 19.8% over one year, 7.9% over three years, 9.2% over five years and 7.9% over ten years in sterling terms. In euro terms, the MSCI Europe Index returned 24.6% over one year, 8.4%% over three years, 7.7% over five years and 7.8% over ten years. Source: Datastream as at 31 December 2019.
Past performance is not a guide to future performance.