Fund managers’ update

The start of 2015 brought the significant improvement in the relative performance of European stocks that we had anticipated. This endorsed our decision to retain an overweight position in (cheap) European stocks in late 2014, when they tended to lag their (often expensive) US peers. We are not long-term bulls on the eurozone. Clearly, extremely high unemployment levels in southern Europe suggest that it has serious structural problems. And although interest rates are zero and the European Central Bank (ECB) has finally committed to quantitative easing (QE) that may not be enough to fix these problems. But although things may appear bleak, they are not getting worse. In fact, we could be near an inflection point. Europe is currently being subjected to two separate forms of economic stimulus at once. Lower oil prices are increasing the disposable incomes of the eurozone’s hard-pressed consumers. A lower euro, meanwhile, is improving the competitiveness of its exporters.

So what kind of European stocks do we like? First, we hold a number of German consumer and media stocks, such as RTL, a broadcaster and Drillisch, a telecoms operator.

But what about Greece? If it does leave the euro, the shock won’t be as great as it would have been a few years ago. Europe’s banks are better capitalised. Portugal and Ireland have exited their bailout programs; Spain could follow. The Portuguese and Irish economies are growing again. Falling bond yields across the eurozone periphery suggest that, with the exception of Greece, the situation in Europe is better today than it was in 2011-12, when it seemed that Greece’s problems might cause the eurozone to fall apart.

So what kind of European stocks do we like? First, we hold a number of German consumer and media stocks, such as RTL, a broadcaster and Drillisch, a telecoms operator. We have also continued to buy real estate investment trusts (REITs), which will be beneficiaries of QE. With bond yields in many parts of Europe falling into negative territory, real estate in second-tier German cities yielding 7% is an attractive proposition — as is prime Norwegian real estate yielding 4%.

The key thing here, of course, is getting currencies right — so we are hedging our euro exposure against the benchmark. In some ways, Europe looks increasingly like Japan. For years, it has been commonplace among investors buying Japanese equities to hedge their exposure to the yen. Worries about deflation and the adoption of QE suggest Europe are reminiscent of Japan’s post-crisis experience, which suggests to us that similar caution on the currency may be prudent.

15 December 2014

2015 outlook: Artemis managers share their views

2014 has been a volatile year for stockmarkets round the world. Will 2015 be any different? Artemis Adrian Frost, Simon Edelsten, Cormac Weldon, Derek Stuart, James Foster and Jacob de Tusch-Lec share their thoughts for the year ahead.