The game is changing



​European equities faced a challenging year in 2015. Initially buoyed by the European Central Bank’s quantitative easing programme, the market subsequently stumbled; tripped up by worries about reaching agreement on a Greek bailout to fretting about the impact of a rate rise in the US.

Most telling perhaps was the People’s Bank of China’s decision to let the yuan devalue, albeit only by a small amount, thus picking up the baton of “competitive devaluation” – a strategy first deployed by the US and which has been followed by Japan and now Europe.

Rising risks

In some ways European markets need a period of consolidation, and events such as the Greek horse-trading and Chinese devaluation have occasionally acted as a pressure release. It is clear, however, that risks are rising, reflected in emerging markets weakness and market unease as the Federal Reserve starts on its long-heralded path to normalising interest rates. The spectre of higher borrowing costs is unwelcome in a world saddled with debt. The western world has a huge sovereign debt burden and investors appear to be waking up to the fact that emerging markets are in no better shape.

More broadly, we may be at a turning point for a number of industries as we start 2016. The car manufacturing sector shows all the signs of peaking, at least for this cycle, although the VW emissions crisis has provided a convenient distraction. Joining the car industry in the slow lane is the capital goods sector, with price deflation (as the chart here shows) reflecting lower demand from Asia and emerging markets, combined with competition in manufactured goods.

Price deflation in capital goods

Source: Liberum estimates, Bloomberg, World Bank, as at October 2015; PPI = Producer Price Inflation,
IP = Industrial Production, year-on-year percentage change

New competition

Many a European manufacturer is set to feel the force of Chinese competition moving up the value chain. The experience of Nokia and Ericsson over the past 15 years at the hands of Huawei, which has taken market share in communications equipment, may provide the template in this respect.

Good long-term prospects

On the flip side, we remain near the beginning of a multi-year, if not multi-decade, boom in innovation, which is manifesting itself in the healthcare sector and the technology sector, such as data storage, the use of data and how companies harness data. It is in areas such as these that European companies can maintain an advantage and retain pricing power.

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Janus Henderson Horizon Pan European Alpha Fund

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