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

23/11/2016

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​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 relative to the rest of 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 of its quantitative easing program will happen during 2018.

Politics will also play a big role in 2017, with elections in the Netherlands, France and Germany, 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 companies 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.


Glossary

Contrarian: An investment style that goes against market consensus or a conventional approach. Contrarian investors believe that crowd behaviour can lead to mispricing opportunities in financial markets.

Fiscal policy: Government policy relating to setting tax rates and spending levels. It is separate from monetary policy, which is set by a central bank.

Growth stocks; Growth investors search for companies they believe have strong growth potential. Their earnings are expected to grow at an above-average rate compared to the rest of the market, and therefore their share price should increase in value.

Monetary policy: The policies of a central bank, aimed at influencing the level of inflation and growth in an economy. It includes controlling interest rates and the supply of money.

Premium: When the market price of a security is thought to be more than its underlying value, it is said to be ‘trading at a premium’.

Quantitative easing: A type of monetary policy where a central bank creates money to purchase government debt or other financial assets, with the aim of reducing financing costs and bolstering the economy.

Volatility: The rate and extent at which the price of a portfolio, security or index, moves up and down. If the price swings up and down with large movements, it has high volatility. If the price moves more slowly and to a lesser extent, it has lower volatility. It is used as a measure of the riskiness of an investment.

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.


Important information

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

Henderson EuroTrust plc

Before investing in an investment trust referred to in this document, you should satisfy yourself as to its suitability and the risks involved, you may wish to consult a financial adviser.

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. Tax assumptions and reliefs depend upon an investor’s particular circumstances and may change if those circumstances or the law change.

Nothing in this document is intended to or should be construed as advice. This document is not a recommendation to sell or purchase any investment. It does not form part of any contract for the sale or purchase of any investment.

Issued in the UK by Janus Henderson Investors. Janus Henderson Investors is the name under which Henderson Global Investors Limited (reg. no. 906355), Henderson Investment Funds Limited (reg. no. 2678531), Henderson Investment Management Limited (reg. no. 1795354), AlphaGen Capital Limited (reg. no. 962757), Henderson Equity Partners Limited (reg. no.2606646), Gartmore Investment Limited (reg. no. 1508030), (each incorporated and registered in England and Wales with registered office at 201 Bishopsgate, London EC2M 3AE) are authorised and regulated by the Financial Conduct Authority to provide investment products and services. Telephone calls may be recorded and monitored.

Specific risks

  • This portfolio will hold between 40-60 stocks. If one of these investments declines in value, this can reduce the portfolio's value more than if it held a larger number of investments
  • If a fund is a specialist country-specific or geographic regional fund, the investment carries greater risk than a more internationally diversified portfolio
  • Most of the investments in this portfolio are not denominated in Sterling, so exchange rates will affect the value of an income from your investment

Risk rating

Henderson Horizon Pan European Alpha Fund

The Henderson Horizon Fund (the “Fund”) is a Luxembourg SICAV incorporated on 30 May 1985, managed by Henderson Management S.A. Any investment application will be made solely on the basis of the information contained in the Fund’s prospectus (including all relevant covering documents), which will contain investment restrictions. This document is intended as a summary only and potential investors must read the Fund’s prospectus and key investor information document before investing. A copy of the Fund’s prospectus and key investor information document can be obtained from Henderson Global Investors Limited in its capacity as Investment Manager and Distributor.

Issued by Janus Henderson Investors. Janus Henderson Investors is the name under which Henderson Global Investors Limited (reg. no. 906355) (incorporated and registered in England and Wales with registered office at 201 Bishopsgate, London EC2M 3AE and authorised and regulated by the Financial Conduct Authority) provide investment products and services. Telephone calls may be recorded and monitored.

Past performance is not a guide to future performance. The performance data does not take into account the commissions and costs incurred on the issue and redemption of units. 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. Tax assumptions and reliefs depend upon an investor’s particular circumstances and may change if those circumstances or the law change. If you invest through a third party provider you are advised to consult them directly as charges, performance and terms and conditions may differ materially.

Nothing in this document is intended to or should be construed as advice. This document is not a recommendation to sell or purchase any investment. It does not form part of any contract for the sale or purchase of any investment.

The Fund is a recognised collective investment scheme for the purpose of promotion into the United Kingdom. Potential investors in the United Kingdom are advised that all, or most, of the protections afforded by the United Kingdom regulatory system will not apply to an investment in the Fund and that compensation will not be available under the United Kingdom Financial Services Compensation Scheme.

Copies of the Fund’s prospectus and key investor information document are available in English, French, German, and Italian. Articles of incorporation, annual and semi-annual reports are available in English. Key Investor document is also available in Spanish. All of these documents can be obtained free of cost from the local offices of Janus Henderson Investors: 201 Bishopsgate, London, EC2M 3AE for UK, Swedish and Scandinavian investors; Via Dante 14, 20121 Milan, Italy, for Italian investors and Roemer Visscherstraat 43-45, 1054 EW Amsterdam, the Netherlands. for Dutch investors; and the Fund’s: Austrian Paying Agent Raiffeisen Bank International AG, Am Stadtpark 9, A-1030 Vienna; French Paying Agent BNP Paribas Securities Services, 3, rue d’Antin, F-75002 Paris; German Information Agent Marcard, Stein & Co, Ballindamm 36, 20095 Hamburg; Belgian Financial Service Provider CACEIS Belgium S.A., Avenue du Port 86 C b320, B-1000 Brussels; Spanish Representative Allfunds Bank S.A. Estafeta, 6 Complejo Plaza de la Fuente, La Moraleja, Alcobendas 28109 Madrid; Singapore Representative Henderson Global Investors (Singapore) Limited, 138 Market Street #34-03/04 CapitaGreen, Singapore 048946; or Swiss Representative BNP Paribas Securities Services, Paris, succursale de Zurich, Selnaustrasse 16, 8002 Zurich who are also the Swiss Paying Agent. RBC Investor Services Trust Hong Kong Limited, a subsidiary of the joint venture UK holding company RBC Investor Services Limited, 51/F Central Plaza, 18 Harbour Road, Wanchai, Hong Kong, Tel: +852 2978 5656 is the Fund’s Representative in Hong Kong.

Information on this document is on Janus Henderson Investors' best endeavours.

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.
  • 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.
  • Measures designed to reduce the impact of certain risks may not be available or may be ineffective.
  • Leverage arises from entering into contracts or derivatives whose terms have the effect of magnifying an outcome, meaning profits and losses from investment can be greater.
  • Any security could become hard to value or to sell at a desired time and price, increasing the risk of investment losses.

Risk rating

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