Henderson’s Bennett warns QE may be too late
Quantitative easing (QE) in Europe could be too little too late, according to Henderson’s John Bennett, who has sounded a note of caution about European company valuations.
The European equity manager said markets would see a significant pick-up in volatility this year and “investors need to brace themselves for difficult markets”.
In January, European Central Bank (ECB) president Mario Draghi unveiled the start of monthly sovereign-bond purchases of ¤60bn (£44bn) from March 2015 until towards the end of 2016.
European markets had rallied in the build-up to the widely expected announcement because QE had boosted the UK and US markets in previous years.
But Mr Bennett, who manages the £2.1bn Henderson European Selected Opportunities fund, said he was less convinced.
He said: “The ECB is clearly seeking to underpin the eurozone, which – as we saw in 2012 – can be very supportive for stockmarkets.
“But equities were cheaper back then and the cycle was younger.”
US equities enjoyed a strong run in 2012 after the then chairman of the Federal Reserve, Ben Bernanke, announced a fresh bout of QE.
However, Mr Bennett said finding companies that were going to grow this year would be harder than it had been in the US in 2012, so European equities were unlikely to emulate the US rally that followed.
“We disagree with observers who maintain that European equities are still heavily discounted,” he said.
“They may look so relative to other markets, but they are not in absolute terms.”
European equities at the “quality end of the spectrum” looked overvalued, Mr Bennett noted.
He said: “There are not that many businesses out there that can consistently deliver higher sales volumes and greater profit margins.” He added that investors have had to pay a premium for companies that could.
Telecommunications was one area in which the manager said he was finding opportunities for his fund.
He said this was “rare territory” for the portfolio as he had been avoiding the sector for a decade.
However, he said there were now “straws in the wind, suggesting that fortunes might be turning for the sector”.
Mr Bennett has therefore reduced his underweight to telecommunications companies, adding to Orange, Telenor and KPN while also opening a new position in Nokia.
The sector made up 4 per cent of his fund at the end of January compared with its benchmark, the FTSE Europe ex UK index, which had 4.37 per cent in the sector.
In addition to his two favoured themes from the past few years – pharmaceuticals and smart cars – Mr Bennett said he was now focusing on what he called “the two scarcities” in the market: “growth and income”.
He said growth in the eurozone was “sluggish” and bond yields had been pushed even lower.
He questioned why investors would want to buy the debt of European companies at such low yield levels. With investors “showing no prospect of relenting their search for yield”, he predicted defensive, high-yielding, bond-proxy stocks “should continue to be rerated in the medium term”.
Manager keeps faith with pharmaceuticals and smart cars
Henderson European equity manager John Bennett is sticking to his guns on two long-standing themes in his portfolio: pharmaceuticals and smart cars.
His commitment to pharmaceuticals and smart cars served him well last year in his European Selected Opportunities fund. Healthcare is his largest sector holding, making up 29.8 per cent of the portfolio.
Switzerland-based healthcare companies Novartis and Roche are Mr Bennett’s top-two holdings, making up 7.5 per cent and 7.3 per cent of his fund respectively.
Healthcare firm Fresenius, which is domiciled in Germany, is his third-largest holding and makes up 5.7 per cent of the fund.
He noted that the group contributed strongly to performance, having benefited from revenue growth in its medical supply division.
Elsewhere, Mr Bennett’s other favoured theme – smart cars – also added considerable value to his fund. Positions in Swedish vehicle components business Autoliv and France-based Valeo boosted the fund’s performance.
Autoliv makes up 3.3 per cent of the portfolio and had a strong performance last year after it announced it would supply replacement airbag inflators to Honda Motor Company.