The global market has been paying close attention to central banks’ movements these two weeks, with central banks of Australia, New Zealand, and Europe all signaling more accommodative measures while the Federal Reserve hints on a rate hike before year end. The Euro Stoxx 50 jumped almost 5% since last week after Mario Draghi, President of the European Central Bank (ECB) says the Bank is prepared to lower its already negative deposit rate and expand quantitative easing to prevent the risk of another round of economic slump, as weak emerging markets are affecting the sustainability of growth of the Euro area. James Buckley, Head of Pan European Equities at Baring Asset Management, tells BENCHMARK in an exclusive talk that despite the uncertainty of growth in the region for next year, it is still at a good value as an investment destination.
The European economy has been fragile since the financial crisis. In 2009, the annual EU GDP had shown a 4.4% contraction but was able to post a sound rebound in the following year where the GDP grew 2.1%. However, the trend did not sustain and the economy fell back to contraction in 2012 and has not seen the 2% line since then.
“The European economy has been experiencing extremely slow growth for a few years now,” commented Buckley. “But there are a few tailwinds in the past few months, including the accommodative policies from the ECB, and the lower energy prices which also benefit the area.” However, he is paying close attention to company earnings to assess the sustainability of economic growth in the region.
Running the Baring European Growth Trust and the Baring Europa Fund with a total fund size of US$ 224 million as of August 2015, Buckley’s portfolios mainly focus on large cap companies in Europe, with France taking up more than 20% of investments in both portfolios.
Buckley emphasizes that they employ a fundamental approach to pick stocks and the inclination in France is just a natural result. “There are a lot of companies listed in France that have global businesses and they can either hedge against ECB’s policies or benefit from them,” he says. “More long-term opportunities can be seen in markets like UK and France.”
He raised the example of Airbus, which stock prices rose 43% year to date. The aircraft company manufactures in Europe and receives mainly dollars as revenue; the weak euro provides a definite advantage.
Although he does not have a mandate on the composition of particular company sizes in the portfolios, Buckley does believe large-caps have their edge on bargaining power. “Facing the challenges of uncertainty in the currency, large cap companies can either do the hedging themselves; compress its supplier to lower the cost ; or pass the extra costs on to customers,” he says.
The funds are highly active funds with high conviction, concentrating in 40 to 50 stocks. Buckley employs bottom-up approaches for stock picking and keeps turnover small for the funds. “It is quite challenging to do active investment when the market goes against you,” he says. “But the conviction helps with performance.”
Both of Buckley’s portfolio overweight financials, health care, and industrial companies and underweight consumer staples and resources stocks.
He emphasizes that the financial sector is much diversified and must be very selective in stock picking. He favors insurance companies as they are of attractive valuation, have strong balance sheets, and provide a positive outlook for growth especially from the expanding Asian market.
Another area worth looking at is specialty financial, including fund management companies. Buckley finds potentials because they are mostly well-capitalized with good prospects of dividend payout and share buyback plans. The long term trend of decreasing interest rate also helps boost the industry.
Buckley also overweights the healthcare sector for its innovation. Long term supportive factors include the aging population and changing government policies to discourage hospital population. He believes the industry is still of reasonable valuation and Novo Nordisk, a Danish healthcare company with franchise in its diabetes medication, is the longest holding stock in Buckley’s portfolios.
On the other hand, Buckley underweights consumer staples because the valuation is not justified by the slowing organic growth; and also the resources sector in which he foresees a significant drop in company earnings.
Buckley acknowledges that the growth in European economy would largely depend on the global development and the market is not massively confident in Europe, however, he still believes it is a market of attractive value. Dividend payout and growth in the company would be the two important fundamentals he is eyeing for the time being. BM