John Bennett, Head of European Equities, gives his thoughts on what he sees as very strong prospects for European equities for the remainder of 2017. He explains why he believes many asset allocators are behind the curve and face missing the boat on Europe, and why investors should ignore the political noise when looking at equities in the region.
What are the implications of the French election?
The implications for me result in a recommendation. This was the same recommendation I made last year, pre-Brexit, pre-Trump, pre-Dutch elections and pre-Austrian elections. Ignore the noise.
Are investors increasingly looking at European equities?
Europe is becoming less ‘unpopular’, which is a positive delta. Will Europe ever be really popular? Many asset allocators are using the political noise as the reason to not buy Europe. I think it’s a mistake to hide behind the sofa. The reasons to not buy Europe are getting knocked away convincingly. I think it is going to be a very strong year (2017) for European equities. I think we are perhaps even a third of the way through the gains already, and I think asset allocators are behind that curve.
I think we will see money come out of US equities and favour Europe. That is consistent with something we said last year, that we are moving globally from a growth to a value market. Europe is more of a value construct than the S&P 500, and for that reason alone, it makes sense that money will favour Europe. Some of that money might move a bit late. As we speak, it is definitely not too late. But it will get late. People tend to buy things, when they think it is safe, but that is the wrong time to move, because that is when you overpay.
Has the growth to value rotation run its course?
The six weeks leading up to the first round of the French election were bad for value and better for growth. That reflected (and was even caused by) what happened in the bond market. You saw Treasuries stall, and yields stall. Bund yields moved back a bit, from the ‘mighty’ levels of around 0.4% to around 0.2%. Such is the world we live in. That knocked on the head, for around six weeks, value over growth. I don’t think that setback is durable. I think that when we finish 2017, we will look back and see that it was more difficult to own, more challenging and more volatile big value names that came to the fore.
Where are you finding opportunities?
I think it is a stock-pickers’ market, but crucially, in a tide that is coming in. In other words, the tide is going to lift ‘most’ boats. I think we are going up, strongly, in 2017. Just in terms of the indices alone. But underneath that I think that stock dispersion is back, with a bang.