John Bennett update: the importance of ‘self-help’ in Europe

27/04/2016

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Are you finding certain areas of opportunity in Europe?

I wouldn’t say that we are over-run with opportunities at a stock or sector level in Europe. In fact, the rotation we’re seeing is making things difficult, and what’s making it more difficult is valuations. I don’t see a lot of bargains – we’re currently having to dig quite deep and we’re moving into ‘self-help’ situations (companies where internal changes could help improve profitability). Yes, I could buy more consumer staple stocks, but they’re on 20 to 23 times earnings. That’s not my favoured hunting ground at that kind of multiple. They could go to 40 times if we enter a ‘nifty 50’ environment* – I don’t know. But I don’t like ‘paying up’ those kind of multiples for perceived ‘safety’ or ‘quality’, and there is a lot of that around. I’m not seeing great opportunity at the ‘quality’ end of Europe. There is opportunity, but it’s very stock-specific among a small group of ‘self-help’ names, and not in top-line growth names where you have to pay up. We’re going more for the stocks where there might be a challenge to top-line growth, but there’s self help.

Is your large positioning in German stocks macro-driven or stock specific?

Country weightings are always a result of the stocks and sectors we buy. So if we like pharmaceuticals, we’ll have a large weighting in Switzerland. It’s not because we like Switzerland – it’s the sectors or the stocks that have taken us there. It’s the same for Germany – if we like Henkel, or Bayer, or Bilfinger or Duerr, it’s stock specific. Country weightings are a residual of the stock decision.

Is the US election having much of an impact on European markets?

I don’t think the US election is having an effect on broader markets. It’s definitely having an effect on our biggest sector, which is healthcare. It’s a noisy time. I met recently with the management of Roche, and they confirmed that it has been very noisy due to electioneering, and there is nothing more noisy than an electioneering politician. So we’ve got a lot of noise whether it be from Donald Trump or Hilary Clinton on pricing in the US. I don’t want to dismiss it and be complacent, but I think the ‘noise factor’ outweighs the fundamentals. I don’t think there will be any meaningful change in the pricing landscape in US drugs in the next five years. If you have innovation, and innovative drugs, you will sell them and you will get your pricing. If you don’t, you’re in trouble.

How will China and commodities affect Europe?

China controls the delta (rate of change) of commodity demand and supply. Within the steel market, China has gone from being a net buyer to a net flooder of markets. But if we think of base commodities like copper or iron ore, I still personally think that’s a bit challenged. I know in recent weeks mining stocks have in some cases gone up two to three fold. I think that’s more about investor flow and positioning than it is about fundamentals. I personally don’t yet see a strong fundamental case for commodities and therefore for mining stocks.

Is the potential for ‘Brexit’ affecting European companies’ investing?

No. I’d be astonished if any company, private or public, is delaying or freezing investment plans because of the potential for ‘Brexit’. I think it is best ignored from an investment point of view.


*A selection of 50 large-cap stocks on the New York Stock Exchange that drove the US bull market in the 1960s and ’70s.

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