European equities in 2017: the contrarian’s first choice?



​What lessons have you learned from 2016?
First Brexit then Trump showed clearly that polling methods no longer work (both results were a "surprise"), but more importantly that voters are no longer willing to accept platitudes and more vague promises from established politicians. Too many promises have been made and not adhered to for too long. In Europe, the worry is that a high level of unemployment could create a fertile breeding ground for further protest votes.

The potential irony in all this is that the Brexit campaign won on a series of imaginative statements (Turkish immigrants, £350m savings per week) and promises that are in direct contradiction with the reality of maintaining full access to European markets. Brexit leaders have all largely resigned or pulled back from those promises (some within 12 hours of the result), and Trump also has adopted a more pragmatic approach within hours of the realisation that reality would prevent some of his promises (a wall has become a fence, Obamacare abolishment has become amendment).

On economies we have learned that low growth means 1 to 1.5% and we had better get used to it. Inflation remains subdued but is rising, and quantitative easing has its limits. Negative interest rates damage economies more than they help economies, and they prevent banks recovering. High growth businesses should maintain a premium valuation to the market, but how much of a premium investors are willing to pay remains unclear; this is a key debate. 

What are the key themes likely to shape the markets in which you invest in 2017?
Eurozone inflation should rise to nearer 2% and 10-year bond yields will likely increase. We know this will have an impact on how to value long-term growth stocks (they are unlikely to maintain as high a premium as they had in recent years) but we do not know how high bond yields will rise (not much more I suspect before 2018) and in what is likely to remain a low growth world we do not know what premium growth stocks will command.

The US will likely tighten monetary policy and by the end of 2017 the European Central Bank will make it plain that tapering will happen during 2018.

Politics will also play a big role in 2017, with elections in the Netherlands, France and Germany for certain, others possibly. After 2016, making any prediction on those is even more risky, but I suspect that established parties will not be decimated in the way that we saw with Brexit and Trump.

After years of disappointment I think that Europe will finally see earnings growth come through helped by better underlying demand, helpful currency effects and less fiscal "austerity" and the possibility of more, albeit moderate, fiscal easing.

What are your highest conviction positions moving towards the new year?
Quality growth compounders that have been laggards in terms of share price, but not in earnings. In a world that has become more (not less) uncertain with Brexit and Trump, these companies have proved resilient in earnings, have continued in many cases to grow, yet have seen their share prices and hence valuations decline. Reliability in a less reliable world, yet at a lower valuation level, sounds pretty compelling to me.

What should investors expect from your asset class and your portfolio(s) going forward?
Europe has moved from a favoured area to an unloved area over the last 18 months. So in some respects it is now the "contrarian's" first choice. The flip side of that coin is the possibility of intense political uncertainty, which may lead to renewed threats to the very existence of the euro. If you put these two extremes together, then volatility is likely to ensue. In volatile times, consistent, reliable companies that increase the returns to shareholders tend to do better.

2017 will be an intriguing year. My expectation is that Europe will not self-destruct, but instead become a haven of stability while the UK tries to figure out what Brexit means (the UK Prime Minister's response that “Brexit means Brexit” does not wash). The world will also try to figure out what Trump truly stands for and what he can do for either the American people or the world.

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Janus Henderson Horizon Pan European Alpha Fund

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