In this Q&A, European equity managers John Bennett (JB) and Marc Schartz (MS) discuss the year ahead and the key themes that they look for when choosing companies for their portfolios.
What is the economic backdrop for European equities in 2020?
While we are undoubtedly entering the later stages of the business cycle, the 2020 economic backdrop looks encouraging for European equities given easing concerns about global growth (or an imminent recession) and an increased likelihood of domestic spending by governments in an attempt to boost the economy.
Partly because of fears of sharply slowing growth, 2019 was marked by pronounced destocking in many areas ranging from pulp to semi-conductors. But with destocking apparently complete and business confidence indicators bottoming out, global growth dynamics should improve, thereby providing a healthy tailwind for Europe’s export champions.
Are domestic European fiscal policies turning supportive?
Expectations of fiscal stimulus by budgetary surplus heavyweights, such as Germany or the Netherlands, have in the past turned out to be like ‘Waiting for Godot’. However recent changes in the political landscape could lead to a shift from policymakers away from their long reliance on monetary policy in favour of greater use of fiscal policy, with a likely focus to spend on construction, infrastructure and environmental issues. A reduced likelihood of a no-deal Brexit in the UK also forces policymakers to come up with new ideas to counter widespread discontent echoed in France and Italy.
Risks to this benign outlook mainly reside with trade-related geopolitical shenanigans, which could provide numerous unpredictable obstacles.
What is your outlook for European equities in 2020?
An exceptionally strong year for European stocks has ended. History suggests that it may be followed by another positive year, though with more volatility and overall much lower general stock market returns. Often it is when things go from ‘bad’ to ‘less bad’ that the greatest market gains are realised. When things go from stable to ‘even better’, however, equities have often already anticipated part of the improvement.
For the new year, trends suggest economic momentum is likely to remain weak over the first quarter, with a chance to revive from the second quarter. Further monetary pick-up is needed, in particular from China, to confirm the stronger recovery scenario that we are now beginning to see reflected in stock prices. The politicisation of global trade has impacted the psyche of management teams, and this may well remain an overhang and rein in animal spirits when it comes to business investments while trade negotiations between the US and China continue.
The upcoming year may well lend itself to a strategy that remains focused on a portfolio of bottom-up, well-researched stock ideas.
What key elements do you look for in a company?
Our working assumption is that disruption impacts all industries and all companies. We look for companies that aim to ‘futureproof’ themselves. Crucially, this applies to the active money management industry too, if it is to move forward and produce outperformance in an environment of great disruption. When looking at the universe of investee companies we ask the question: can this industry or company roll up its sleeves and get ahead of disruption or is it fated to roll over and slowly expire.
The common trait of our holdings is a strong management team demonstrating unwavering focus on shareholder value creation, buttressed by strong balance sheets. We continue to believe that meeting with and scrutinising the management teams of these companies is among the best uses of our time.
Fiscal policy: Government policy relating to setting tax rates and spending levels. It is separate from monetary policy, which is typically set by a central bank. Fiscal austerity refers to raising taxes and/or cutting spending in an attempt to reduce government borrowing. Fiscal expansion (or ‘stimulus’) refers to an increase in government spending and/or a reduction in taxes.