Europe in a world of “alternative facts”

17/02/2017

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​These are interesting times. Suddenly everything is different – populism has become protectionism under the mantra of ‘Make America Great Again’ and Brexit is set to lead the UK to sunnier climes. A few minor details, such as the interconnected nature of global supply chains and the relationships between companies and regions, are being forgotten for now.

Europe is in many ways now in the eye of the storm. The UK is stumbling along an undefined and unknown path towards Brexit, with the government promising no damage to the economy and full access to European trade, while not paying any bills. A few nervous dissenters, quickly shouted down by a partisan, right-wing press, are quietly asking ‘how?’
 
Pragmatism still dominates European politics
 
The political backdrop in Europe outside the UK continues to make everyone nervous. The Netherlands will be first to the polls in 2017, and the Far Right party of Geert Wilders will, like all European ‘alt-right’ parties at present, probably poll a significant number of votes on an anti-immigration bill. But Wilders will not be included in a coalition government when it comes to running the country. As an aside, if there is a referendum in the Netherlands, the Dutch have made it quite clear that it would be advisory only. It is a pity that now ex-Prime Minister Cameron did not think through the potential risks of the UK referendum in June 2016. This was a point made by the Supreme Court in a recent ruling over how the UK government can start the process to leave the EU (Article 50).
 
France faces a key election in April and May, and there is a growing opinion that, even if Marine Le Pen of the extreme-right National Front party makes it through to the second round of voting in May, she will probably lose out to either François Fillon (Republican) or Emmanuel Macron (Independent) in a repeat of the 2002 election, when her father lost convincingly to Jacques Chirac. Autumn sees the German elections, where it looks like Chancellor Merkel will be re-elected.
 
Is regional recovery taking hold?
 
The suggestion is that populism will not overthrow the European path of ‘boring but reliable’ economic progress. That may enable investors to look again at out of favour European markets and the improving trend in profits. Given that Europe's gross domestic product (GDP) is expected to grow by about 1.5% in 2017, and that an improving economic climate is leading to more relaxed government spending, there is every reason to hope that Europe is now in a virtuous, rather than vicious, circle.
 
With a combination of better growth and emerging inflationary pressures (chart 1), yields on 10-year bonds have risen to over 0.3% in Germany and over 2.3% in the US, as at 8 February 2017. This has major implications for banks and recovery names. It is clear that, regardless of intense global political uncertainty, the market has chosen to believe in the hope of economic recovery.
 
Chart 1: Inflationary pressures picking up in euro area
 
Source: Thomson Reuters Datastream, Fathom Consulting. ‘Headline inflation’ is percentage year-on-year change in the Euro area, as at 9 February 2017. The European monetary policy committee (MPC) has a target of near or below 2% for headline inflation.
 
It remains to be seen how strong this recovery turns out to be, or how long it lasts, but it would be wrong to ignore it. Companies more sensitive to changes in the background economy, such as Atlas Copco in Sweden and Siemens in Germany, are seeing an improvement in many areas related to higher consumer spending. Banks are seeing a widening net interest margin (the difference between the income generated from loans and the interest paid out to depositors), albeit a gradual one, and increasing demand for loans, as chart 2 shows. 
 
Chart 2: Demand for loans is increasing
 
Source: Thomson Reuters Datastream, Fathom Consulting, covering Euro area, as at 30 December 2016.
 
Markets have seen a rapid move out of ‘growth’, and into ‘value’. This is an over-simplification, but one that gives a reasonable gist of what is happening. This switch has pushed up the price of ‘value’ stocks to beyond their ten-year average, while valuations on growth stocks have fallen below theirs. This trend may have further to run, but the key to 2017 will be signs that the shift towards value has gone far enough, given the reality that growth in our ‘mature, low growth world’ cannot be conjured into existence like a magic trick.
 
There are significant hurdles ahead, but they are not yet visible. We are keeping a wary eye open, while looking for outstanding companies that have been penalised far too harshly by the market. We accept that it looks too early to make a significant move back into ‘growth’ yet, but that may well be the direction of travel on a six-to nine-month view.

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 Equity 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.
  • 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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