John Bennett, Head of European Equities, explains why he believes European equities are set to outperform in 2017. Last year saw a change in leadership from a ‘growth’ to ‘value’ environment, which should favour Europe, however, investors should be prepared for a volatile journey.
There are a number of supportive factors leading me to continue to believe that Europe is set to outperform in 2017. While noise – in the form of populist political risk – gives justification to the stale bears, I believe most will eventually capitulate as Europe muddles through numerous elections.
One key consideration is Europe’s performance versus the US, which has outperformed Europe by over 100% since the end of 2008, and is now at a 40-year relative high.
US has outperformed…
Source: Henderson Global Investors / Thomson Reuters Datastream, at 31 January 2017. Rebased, in local currency terms.
As I have said before, 2016 marked an inflection point in market leadership – the baton has passed from growth to value. But so far, 2017 has been led by ‘growth’ and especially mid caps. This challenges us due to our large cap focus, and all the more so given that we are the most value-tilted we have been in years. But I believe large cap value is warming up to surprise in 2017. This is good news for Europe, which is likely to be the key beneficiary, as demonstrated by the value-heavy make-up of the Euro Stoxx 50 Index.
…but value favours Europe
Source: Henderson Global Investors / Factset, at 31 January 2017.
The reasons for the switch to value are numerous. However two factors are central to this thesis: first, central bankers are running out of road on what they can do with quantitative easing. Second, valuations have been stretched for ‘quality’, low volatility bond proxies. The end of 2016 saw the high water mark in demand for these oh-so comfortable stocks. This inflection – combined with a turning point in interest rate expectations and vastly improved capital ratios – has finally made the banking sector once again investable.
It is very important for clients to understand that ‘value’ can be a rough ride. Therefore our volatility of returns is likely to be higher. It is very challenging on a day-to-day, week-to-week basis, but we believe in our positioning and must be resilient.
In my view it is important to embrace volatility in 2017. Too many managers are in “safety” and popular mid caps – we see more opportunity in buying value and holding on tight.