100 Club: Recovery in Europe gains momentum
The era of false starts for Europe’s earnings recovery is “in the rear-view mirror”, with companies on the continent set to outpace global peers, JPMorgan Asset Management’s John Baker has said.
The co-manager of the group’s £387m Europe Dynamic ex UK fund said earnings revisions were the “single biggest determinant” of share price movements in the short term and that some stability was starting to emerge.
“While one cannot overlook the choppy earnings cycle that has characterised the past couple of years, such false starts are now in the rear-view mirror,” he said.
“Earnings growth is starting to come through and earnings expectations are being upgraded across the market.”
Mr Baker said analysts were estimating earnings would grow roughly 15 per cent, with European earnings growing faster than global earnings.
He said with this in mind, one of the areas he had been targeting was financials.
The manager said he was overweight financial services and highlighted Italian asset managers Anima and Azimut as two favoured stocks. “Both companies are benefiting from low returns available for cash deposits and bond funds,” he said.
“Such developments are contrary to Italy’s historical context, where the financial services industry has widely been regarded as the poor relation when compared to the rest of Europe.”
The eurozone’s economic core, Germany, has also caught the attention of Mr Baker and his two co-managers, Jonathan Ingram and Blake Crawford.
He said the country had a strong real estate sector and he had sought to tap into this by backing Leg Immobilien and Deutsche Annington.
“Both stocks are benefiting from a strong economic recovery, [positive] net immigration into Germany and urbanisation,” he said.
“Both companies are updating their portfolio of rental blocks, making the rental yield particularly attractive against Germany’s macro context.”
On the macro front, Mr Baker said he had no direct exposure to Greece, which last week rattled markets globally after prime minister Alexis Tsipras called a referendum on whether the Greek people should accept its creditors’ proposals.
The move led to the European Union, European Central Bank and International Monetary Fund halting emergency funding, prompting Greece to close its banks last week to prevent capital leaving the country.
Mr Baker said he was also comfortable his portfolio had “minimal” exposure to stocks that could be impacted by a Greek exit from the eurozone.
For example, in terms of the fund’s holding in BNP Paribas, the French bank had material exposure to Greece the last time a ‘Grexit’ was feared in 2011-12, and at the time there was a risk of contagion and liquidity problems, he said. “Such a risk is no longer the case,” he added.
