EU elections: all thunder and no lightning

28/05/2019

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​Do the EU election results represent a significant change for European investors?

In our view, the EU election does not represent a significant change for European stock markets, particularly at the smaller end of the market cap scale. Despite the rise of potentially antagonistic populist voices in the EU, there is no clear desire for a break-up of the bloc, although the result may represent a risk of disruption to the traditional party system at a national level.

A bigger concern for us is the disappointment over the escalating tariff war between the US and China. Markets have gone from pricing in the expectation of a deal, to pricing in the expectation of no deal in less than a month. Investors are paying up for what they see as ‘low volatility’ stocks. We believe they are overpaying for safety, and overpaying for perceived structural growth as a thematic investment strategy. We are not convinced that this strategy is as risk averse as many would believe, and we believe that there are better alternatives, but that is a matter of opinion. In our view, investors have never paid so much for perceived low volatility, and we think that there is inherent risk in such a crowded market place.

Conversely, more economically sensitive (cyclical) stocks have priced in the risk of what we can only describe as a prolonged recession. In the short term, it is difficult to argue in favour of material improvements. But current prices may represent a good opportunity for longer-term investors. 

Is the political impasse in the UK creating a decent value opportunity?

The UK is still an underweight for me and I cannot see any short-term reason for this to change. Contrary to many opinions, we do not believe that the UK is ‘unbelievably’ cheap, although we are interested in selected areas where we perceive the potential for structural growth, such as housing. We are reaching a point where ‘no deal’ is starting to be factored into pricing. We think that this is more likely after the EU election result and with a Conservative leadership contest ahead.

Were the Conservatives to elect a more right wing leader, it would indicate the likelihood of a lower tax rate regime in the UK. For the EU elite, perhaps the most controversial risk of Brexit is the possibility that the UK might – over time – become the ‘low tax/low regulation’ Singapore of the western world. Were the UK to be forced down the ‘no deal’ route, which now seems more likely than it did a few months ago, the UK may be faced with few alternative options.

Our view changes as we look across the Channel, where many European companies with UK exposure are, in our view, deeply undervalued. Danish international shipping/logistics firm DFDS is among those stocks where sustainable high returns are not being reflected in the share price. Similarly, anything with exposure to China has been sold off heavily, reflecting uncertainty over the US/China trade war. While this is understandable, exposure to China is not always bad. Companies like French retailer SMCP are continuing to do well in that market.

How are you positioned in the European smaller caps market?

European smaller companies have always been geared to local growth factors, with exceptions. No matter the uncertainty in Paris or Berlin over the EU election result, there will always be positives at the margin. The entrepreneurial spirit persists in the EU. It is just a question of finding the stocks that are undervalued. They exist. For example, the computer gaming market in Sweden is interesting, while the Netherlands is emerging as a big beneficiary of Brexit uncertainty.

In this environment we remain strongly valuation aware in a market that is not, and continue to avoid paying up for potential growth. We maintain a relatively large presence in basic materials and technology versus financials and business providers. Ultimately, though, we remain in an environment of persistent lower growth. We prefer companies with lower debt, delivering a higher return on equity and have maintained a decent amount of dividend cover in our strategy, which provides some level of comfort in uncertain times.

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

Janus Henderson Horizon Pan European Smaller Companies Fund

Specific risks

  • 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.
  • 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

  • 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.
  • 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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