Are we at a turning point in sentiment towards Europe?

27/11/2018

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Europe remains a relatively unpopular region for global investors, despite some positive indicators. But are parts of the market now fundamentally undervalued? In this forward-looking perspective, European equities manager Ollie Beckett considers the prospects for better performance from European smaller caps in 2019.


What are the key themes likely to shape markets in 2019?

The performance of European smaller caps has been disappointing in 2018, following a period of strong gains in 2017. One thing that many underestimated was the impact of politics, from fears over the potential fallout from US trade conflict with China, to concerns around the impact of Brexit and the confrontational new government in Italy. At the same time, in the US, President Trump has pressed forward with a policy of corporate tax cuts and higher spending. Whatever you think of Donald Trump, over the short term at least, his policies have given the US economy and US stocks a boost.

The consequence of this is that we have seen money flowing out of Europe and into the US. Europe remains a relatively unpopular region for global investors, in spite of a generally steady improvement in company earnings and generally positive economic data. But at some point, we expect this negative view to change. We have seen what may be early signs of a reversal as we move towards the end of 2018. But it is too early to say if this represents a more significant turning point.


Where do you see the most important opportunities and risks within your asset class?

As ever, our view is predominantly guided by the best opportunities we are finding at the stock level. While taking a pro-value and pro-cyclical bias was a challenging position to hold in 2018, we have been shocked as to how quickly share prices have priced in a material slowdown in economic growth. As uncomfortable as it may seem, we believe that valuations are now attractive, and we believe that European smaller caps offer good prospects for investors over the long term.

In terms of the risks, we are a number of years into a bull market and some companies are starting to see margin pressures, due to wage increases, and higher input and logistics costs. We expect this process to continue as we move through the latter stages of the current economic cycle.


How have your experiences in 2018 shifted your approach or outlook for 2019?

Looking back, it is clear that investors entered 2018 with expectations and hopes that were almost too good to be true for the European economy. This optimism slowly subsided during the year – reaching what we see as a more ‘normal’ level. While valuations on European smaller caps look attractive on both an absolute and relative basis, 2018 reminds us that – in the right environment – people are willing to pay over the odds for growth, and for those stocks they feel offer greater security. While we expect volatility to persist, we believe that parts of the European smaller cap market are fundamentally too cheap. In this environment, the challenge will be to ensure that we identify the potential winners.



Which themes have the potential to redirect markets in 2019? Download our Infographic to find out




These are the views of the author at the time of publication and may differ from the views of other individuals/teams at Janus Henderson Investors. Any securities, funds, sectors and indices mentioned within this article do not constitute or form part of any offer or solicitation to buy or sell them.

Past performance is not a guide to future performance. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested.

The information in this article does not qualify as an investment recommendation.

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Important information

Please read the following important information regarding funds related to this article.

Janus Henderson Horizon Pan European Smaller Companies Fund

Specific risks

  • Investment management techniques that have worked well in normal market conditions could prove ineffective or detrimental at other times.
  • Shares can lose value rapidly, and typically involve higher risks than bonds or money market instruments. The value of your investment may fall as a result.
  • This fund is designed to be used only as one component in several in a diversified investment portfolio. Investors should consider carefully the proportion of their portfolio invested into this fund.
  • The Fund could lose money if a counterparty with which it trades becomes unwilling or unable to meet its obligations to the Fund.
  • If a Fund has a high exposure to a particular country or geographical region it carries a higher level of risk than a Fund which is more broadly diversified.
  • Derivatives use exposes the Fund to risks different from, and potentially greater than, the risks associated with investing directly in securities and may therefore result in additional loss, which could be significantly greater than the cost of the derivative.
  • Changes in currency exchange rates may cause the value of your investment and any income from it to rise or fall.
  • If the Fund or a specific share class of the Fund seeks to reduce risks (such as exchange rate movements), the measures designed to do so may be ineffective, unavailable or detrimental.
  • Shares of small and mid-size companies can be more volatile than shares of larger companies, and at times it may be difficult to value or to sell shares at desired times and prices, increasing the risk of losses.

Risk rating

Janus Henderson Pan European Smaller Companies Fund

Specific risks

  • Investment management techniques that have worked well in normal market conditions could prove ineffective or detrimental at other times.
  • Shares can lose value rapidly, and typically involve higher risks than bonds or money market instruments. The value of your investment may fall as a result.
  • This fund is designed to be used only as one component in several in a diversified investment portfolio. Investors should consider carefully the proportion of their portfolio invested into this fund.
  • The Fund could lose money if a counterparty with which it trades becomes unwilling or unable to meet its obligations to the Fund.
  • If a Fund has a high exposure to a particular country or geographical region it carries a higher level of risk than a Fund which is more broadly diversified.
  • Derivatives use exposes the Fund to risks different from, and potentially greater than, the risks associated with investing directly in securities and may therefore result in additional loss, which could be significantly greater than the cost of the derivative.
  • Changes in currency exchange rates may cause the value of your investment and any income from it to rise or fall.
  • If the Fund or a specific share class of the Fund seeks to reduce risks (such as exchange rate movements), the measures designed to do so may be ineffective, unavailable or detrimental.
  • Shares of small and mid-size companies can be more volatile than shares of larger companies, and at times it may be difficult to value or to sell shares at desired times and prices, increasing the risk of losses.

Risk rating

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