Is Europe playing tortoise to the hare?



European equities manager John Bennett gives his thoughts on a potential change in market leadership, following a lengthy period of outperformance for smaller and mid-sized growth stocks. He also considers the prospects for better performance from good quality European names that have been unfairly hit by negative market sentiment.

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

In my view, we are starting to see hints of what may be a change in market leadership. These are not necessarily definitive changes. It may just be profit-taking in more successful/hot areas of the market – namely small and mid-sized (mid-cap) growth stocks. However, it could be an indication that the lengthy bull market in small and mid-caps, relative to large caps, is over or at the very least, much less one-way. Disruptors, growth stocks and momentum stocks (beneficiaries of favourable trends in the market) have received an awful lot of benefit of the doubt, especially when it comes to tech disruption. Some of it is valid, some of it is justified but in my view, some of it is not.

Our industry loves to see things in black and white and I think, after 31 years in the industry, I have tended to find more shades of grey. Right now, Europe looks attractively priced relative to the US. This alone absolutely does not mean Europe is a buy; many a European company deserves to be out of favour. I think the next few years will remind us of the parable of the tortoise versus the hare and on that basis, I think that we can still identify a few ‘tortoises’ in Europe; a few terrific cash generators that will win in the long term, even if companies like Facebook, Amazon, Netflix, Alphabet, or Tesla tear off like hares.

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

I do not want to bang a drum about an asset class, because it is a bit disingenuous. I also think it is a bad idea to become an apologist for whatever asset class you happen to be managing. However, that being said what I see, especially this year, is some babies being thrown out with the bathwater, both at a stock level and at the asset allocation level in Europe. There are some terrific franchises in every sector that happen to have been born, or are based, in Europe that have been caught up in this wholesale rush to the exits. For choice, I want to be gradually, ever-so-slowly, buying back into those names that have been unfairly tipped out. I think the real trouble is coming in the hold-outs (companies that have continued to rise in value, resisting recent market volatility) – tech stocks in particular.

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

At the start of the year it was our view that we were heading for, at the very least, a long-overdue slowdown, or soft patch, and we have certainly seen that. I felt that the first quarter of 2018 was as good as it was going to get in terms of global growth. Our response has been to focus on the stocks in our portfolios, and on further stock-picking.

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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