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TAKING STOCK
Round Table

The Taking Stock panel conduct a lively discussion on the situation in Europe which is full of debate, controversy, opinion and views. The discussion was chaired by David Stevenson of the Financial Times who was joined by investment experts from Alliance Trust, Aberdeen Asset Management, JP Morgan Asset Management and F&C Investments.

David: Why would I want to invest in Europe at the moment? Where’s the growth going to come from?

Stephen: There’s been an enormous amount of coverage of European affairs focusing overwhelmingly on political Europe. Political Europe is very different from economic Europe and economic Europe is very different from corporate Europe. Corporate Europe is one of the most widely diversified investment areas in the world. Nearly half of all revenues are generated outside the eurozone, so domestic European growth is not as important for European companies as overseas trade and export markets.

David: So in a sense Europe is not dissimilar to the British markets - full of quality big companies selling to an internationally diversified market. Surely the big concern is that the rest of the world is still slightly dependent on what happens in Europe.

Sam: I think they certainly are, but we tend to get very excited with equities when pessimism is at its highest. I mean, when your Grandma asks you about the Euro you know it’s a widespread fear and generally that is reflected in the stock market which tends to discount things early.

David: I suppose the big concern is at the end of day, valuations may be low but they are based on expectations of profits and profits are unlikely to advance much in Europe. It’s difficult to mount a case for investing in European equities, or are we being too pessimistic?

Bertie: I think we’re probably being a little bit too pessimistic, but at the same time I think we’re always over generalising about the European market as being one large entity. There is a great degree of diversity within Europe, I think if you focus on companies that have long term structural growth drivers, that’s really where you should be looking as an investor in Europe. I think stock picking is even more important than it probably has ever been at the moment so you need to focus on the companies, not overly generalise and not think about markets too much and really be a bottom up investor.

David: The big question for me and I think for an increasing number of investors and commentators is where is the growth coming from?

Bertie: You don’t necessarily have to have growth to have good stock market returns. Admittedly it’s nice to have, but if we wound back a year and looked at the view on what was happening in Ireland, you never would have guessed that now we’re looking at a year where Ireland, as measured by MSCI was the best performing stock market globally so you can get very good returns when the outlook is very poor.

David: Fiona, at Alliance Trust you have quite a wide view. What do you think looking at both regionally and sectorally are the most interesting European ideas for you at the moment?

Fiona: I think it is worthwhile looking at the regions of Spain and Italy. I think it’s maybe a bit early, but I actually remember, the Swedish banking crisis and made a lot of money. I did the work and it was maybe six to nine months later when I actually finally did the investment, so you have to go to these regions, identify opportunities early. You might not invest in them but you then know the timing. For example, people don’t like Spanish banks at the moment but they’re further down the line of cleaning up their property sector potentially than other countries are. They’re quantifying it to some extent and you’re going to end up with a very consolidated sector there with just a few leading players.

David: How cheap are some European markets?

Stephen: I think if you looked at it as an area, there’s always an issue with using any particular valuation multiple - P/E, price to cash, dividend yield. There are issues with each of them, but if you look on a blended basis then the market is relatively attractive at the moment. If you look at the return available in equities relative to other asset classes, more than half of all European markets trade with a dividend yield that’s higher than their local bond yield.

David: Sam what are the real pockets of value that you see?

Sam: Despite the move we’ve had in financials, I still think it’s an area which European investors are generally underweight in. Again you’ve got to look at the stock specifics, you don’t want to be going out there and buying any bank, you want to be able to find a bank that’s well capitalised that actually can get funding at decent rates and you’ll find actually that their competition in the lending market has disappeared and they can make great margins on the lending, despite the higher regulations they can make very good returns. I also think technology is an interesting area. I should think technology and financial areas are where you can find very good value.

David: Bertie, where are you finding the most compelling values?

Bertie: I think when one looks at the sectors, the way that we construct portfolios, we start with the stocks and actually the sectoral overlay is really a function and output of that from the bottom up. One good example where we still think it’s good value would be the industrials.

David: Fiona what should investors’ exposure to Europe be?

Fiona: Well, it depends on your levels of risk, because if you’re a long term investor then you can easily have exposure to solid companies such as Nestlé and L’Oreal that have been around for a long time and they will still be around in the future. They’re a low risk investment that just happen to be based in Europe so I think you could easily have exposure to those types of companies in your portfolio, so definitely 15% to 20% of your portfolio.

David: Where’s your hunch? Should investors be in line with the amount of Europe as part of the MSCI World? Do you think it should be overweight or underweight?

Bertie: I wouldn’t be underweight at the moment. I’d probably be equal weight or overweight. We talked already about the valuation opportunities there are in Europe but I think you have to carefully distinguish between actually buying the market and stock picking. I think you need to focus on stock picking, so I would advise investors not to necessarily buy an ETF or a tracker fund that gives you exposure to the European market, per se, but focus on people who provide funds that actually focus on the bottom up because it’s actually the companies that will have structural growth that will continue to flourish given how uncertain the macro environment is, and I think that’s the kind of vehicle investors need to have exposure to.

Sam: I’m not an asset allocater but I think the level of pessimism should give you more encouragement to buy the European equities. If we looked at the returns last year and the problems that Europe had, yes it was negative but actually the BRIC countries performed worse than Europe and that reflects the fact that the consensus is to be overweight the emerging markets. But actually when the consensus is telling you very often you shouldn’t be doing it, that actually makes me very excited about the market.

David: If I’m looking for quality stocks big, globally diversified companies, why wouldn’t I just go and invest in America or the FTSE 100?

Sam: The straightforward answer is the valuations and they are materially different. The valuations of the US companies versus Europe. I wanted to quickly pick up on the Japanese point. Europe and Japan have been compared, but the problem with Japan is the shareholder culture there has been very poor and the Olympus scandal of last year reflects that. That was many, many years after they first went into the crisis and the shareholder culture in Europe has improved dramatically over the last 10 years. It’s still got further to go in some countries but I think shareholders are looked after a lot better in Europe than somewhere like Japan and other emerging markets.

David: Given a straight choice between investing in the Anglo Saxons, the UK and the US and Europe, is Europe facing up to its problems? Would you secretly be investing in the USA?

Bertie: No I don’t think I would. I think I would be looking to invest in pan Europe really. I think the UK and Europe is a good blend of companies and gives you a good blend of exposure to global growth and companies with strong intellectual property and they’re trading on rock bottom valuations in many instances. I do think the shareholder value has got better; the focus on boards, corporate governance and all the things that we’ve talked about is improving. It’s still a long way behind where it is in the US and the UK. In some instances that’s not necessarily a bad thing but I do think that investors have to go into European investments with their eyes open. I would be positive on Europe I think there are some great companies there.

Roundtable

This round table event was filmed at the Tate Modern, London on 15 February 2012. All information was correct at that time but please keep in mind the following information:

Investment markets and conditions can change rapidly and as such the views expressed should not be taken as statements of fact nor should reliance be placed on these views when making investment decisions. Forecasts are opinion only, cannot be guaranteed and should not be relied upon when making investment decisions. Past performance is not a guide to future performance. The value of investments and the income from them can fall as well as rise and is not guaranteed. Investors may not get back the amount invested. Whilst care has been taken in compiling the content of this video, no representation or warranty, express or implied, is made by Alliance Trust Savings Limited as to its accuracy or completeness. Nothing said or covered in this video should be construed as being an invitation or inducement to engage in investment activity. No advice is given by Alliance Trust Savings Limited. For advice on investing, please consult an independent financial adviser Alliance Trust Savings Limited is registered in Scotland, Company No. SC 98767. Registered office at PO Box 164, 8 West Marketgait, Dundee DD1 9YP; Alliance Trust Savings Limited is authorised and regulated by the Financial Services Authority and is entered on their register under number 116115 (www.fsa.gov.uk)



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