Are we finally seeing a challenge to market leadership in Europe? Here, John Bennett, Head of European Equities, reviews the first six months of the year, addressing some of the factors behind his view that 2018 will be a year for stock selection, rather than significant sector decisions.
What is your view on the first half of 2018?
I went into 2018 actually quite uncomfortable with some of the consensus views in the market. When 2018 began, there was a general view that things were great: Europe had joined the US and China in seeing strong growth. It looked like all systems go for the GDP growth party. But actually, if you had looked at the monetary aggregates, they were already signalling that we might have hit the point where it was as good as it was going to get.
I felt that we were going to see a challenge to market leadership in 2018, ending a decade of growth stocks hammering value stocks, and small/mid cap hammering large cap. This is what I meant when I wrote, “welcome back volatility” at the start of the year. That is not to say that I believed we were headed for some sort of slump or a recession, but I just felt that the consensus view of synchronised global growth was there to be tested, and I think we have already experienced a bit of that test.
What are your expectations for the remainder of the year?
I am not convinced this is a year where you want to be delegating the task of making money to an index. I think 2018 is not a year for the index, or for making significant sector decisions. For me, this year is about stocks. I think stock dispersion is back, which means which bank do you want to own? Which pharmaceutical do you want to own? Which growth stock? Which value stock? We are very rarely asked what we don’t like, and yet it is at least 90% of the investment decision. This year, what you don’t like will be just as important as what you do.
What is the biggest strategic decision you have made this year?
We took the decision to reduce exposure to European banks in January this year, reverting to our normal relatively low exposure in the sector, with a focus on regional and domestic names that other people might consider boring.
Monetary aggregates: A measure of the amount of money circulating in a country’s economy, or a particular sector.
Growth investing: Growth investors look for those businesses capable of growing their earnings at an above-average rate compared to the rest of the market, with a consequent increase in the value of their shares.
Value investing: Value investors search for companies that they believe are undervalued by the market, in the belief that their share prices will increase over time to reflect their real worth.
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.
Stock dispersion: A term that refers to the gap in price between the best and the worst stocks in a market, sector or country. A high level of dispersion can be considered a good test of a manager’s ability to identify good quality, undervalued stocks, rather than relying on broader market trends to deliver performance.
Yield curve: A graph that plots the yield of fixed-interest securities, such as bonds, against the length of time until they reach maturity (the date at which a debt is due to be paid back). The longer the maturity, the greater the risk, so the yield curve usually slopes upwards to reflect the higher interest rates on offer for longer-term debt. A flattening yield curve can be caused by a range of factors, but it can also suggest that problems may lie ahead for the economy.
Interest rate margin: The difference between the amount of interest generated by banks on their lending, and the amount of interest paid out to depositors (such as bank account holders).