Top-performing European equities manager Julien Bernier has warned that the continent’s recovery is still reliant on external policymakers following the short-lived impact of the European Central Bank (ECB)’s actions in June.
Markets started the month on a high as ECB president Mario Draghi (pictured) took his scissors to the deposit rate, taking it into negative territory to counter the risk of deflation in the eurozone, devalue the euro and stimulate growth.
“The effect of these announcements were soon exhausted, and the euro quickly returned to its previous level and European indices ended the month with performances close to zero,” said Mr Bernier, manager of the £275m Luxembourg-based J Chahine Capital Digital Stars Europe fund.
He added: “Europe’s recovery is very much in the hands of the US Federal Reserve. It is very important that it, not just the ECB, remains accommodative.”
In spite of the problems, Mr Bernier remains optimistic.
“While Europe and the US are both trading at 16x earnings, the US is at a cycle high in terms of profit margins,” he said. Profit growth there should be very low in the coming year, but European companies have the potential to grow, given the region is still below what it was pre-crisis in terms of profit margins.
The quantitatively run £275m Digital Stars Europe portfolio has enjoyed a run of strong returns in recent years. As at July 4, it was the top performer in the IMA’s Europe Including UK sector in one, three and five years, with respective returns of 26.6 per cent, 47 per cent and 147.7 per cent.
Launched in November 1998, the fund has a small- and mid-cap bias and has an investment universe comprising 1,700 companies, 160 of which make the grade at present.
Mr Bernier said: “We apply price momentum criteria and look for companies that surprise on the upside, stocks that achieve share price growth in one to six months.
“Typically, it is 10 to 20 per cent of the fund driving the real outperformance. On top of the quantitative model there is a qualitative approach. We are quite strict in the application of our process, but there is this quality control overlay.”
Following Mario Draghi’s “whatever it takes” speech in July 2012, the fund adopted a cyclical bias, going overweight industrials and consumer discretionary, as markets embarked on the road to recovery.
“We started 2014 with a cyclical profile, but during April and May there was a sector rotation, and in our subsequent rebalancing we introduced more quality firms, notably from the utilities and telecommunications sectors,” Mr Bernier said.
“We do, however, remain slightly overweight industrials and consumer discretionary.”
In spite of the manager’s optimism, he acknowledged the fragility of Europe, citing the recent problems in Portugal, where the Lisbon regulator suspended trading of shares in Banco Espírito Santo after the stock plunged as fears escalated over the strength of its parent, Espírito Santo group.
The UK also presents its own set of challenges for Mr Bernier. With 22.4 per cent allocated to Great Britain, the manager is 8 per cent underweight.
He said: “While the weighting is linked to the quant model it illustrates the main fears over the prospect of rising interest rates and the potential such a move has to spook markets.”