Several leading European equity managers have increased their exposure to the continent’s periphery.
The managers said they had spotted opportunities in the troubled economies and had either initiated positions in the area or increased their focus on it.
The FTSEurofirst 300 index dropped by 1.5 per cent on Monday as a political poll in Italy showed former prime minister Silvio Berlusconi making headway among the country’s electorate. Meanwhile, fears of a backlash against Spain’s leader Mariano Rajoy also surfaced.
The unease in markets was also expressed in the country’s bonds on the same day, with Spain’s 10-year bonds moving to 5.44 per cent and Italy’s to 4.47 per cent.
Later in the week Spain’s rate had recovered mildly to 5.41 per cent, but Italy’s rose further to 4.54 per cent.
Franklin Templeton’s Michael Clements said he had turned his attention to domestic Spanish stocks after his exposure to peripheral Europe helped his Euro435.9m (£376.8m) European Growth fund achieve a top-quartile 12-month return.
“We’re hunting in Spain and Italy, and cautiously in Greece. We’re looking now at the domestic Spanish consumer stocks and in particular a media company. People are taking money out and putting it in to Germany, so we are buying from forced sellers.
“Spain got hammered and has still got problems – it is still an unloved market. More people are looking at the Spanish market now but we have been there for more than six months.”
The fund’s 12-month return ranks as top quartile – it delivered a 23.5 per cent gain, compared with the Europe including UK sector’s 18.3 per cent average growth, according to FE Analytics. In three years, it also outperformed the sector, gaining 40.9 per cent.
James Sym, co-manager of Cazenove European Income fund, said even though much of the “explicit crisis discount” from the summer had closed, he still saw opportunities.
“The most anti-consensual trade now is that we see a normal cycle, particularly in the periphery,” he said.
“We therefore like companies that are cheap on recovered earnings even if in the near term they appear expensive. These tend to be later-cycle businesses and some higher quality peripheral cyclicals, especially mid-caps like Spanish insurance company Catalana Occidente, Italian household appliance manufacturer Indesit and asset manager Azimut.
“For choice, Italy seems in better shape than Spain although both should benefit. We avoid those that saw a super cycle, never to be repeated, such as Spanish construction stocks and, frankly, most banks.”
The manager said the fact large-cap value had been left behind meant there was a “short-term catch-up trade”, which he was playing through utilities and telecommunication stocks.
Polar Capital’s Financial Opportunities manager John Yakas took his first steps into peripheral Europe since the fund was launched after starting positions in Greece and Italy.
Mr Yakas said he recently added positions in Italian bank Intesa SanPaolo and the Greek stock exchange Hellenic Exchange, leaving his peripheral exposure sitting at roughly 3-4 per cent.
Since launch in May 2011, the fund’s return of 11.8 per cent has been greater than the benchmark MSCI World Financials index’s 9.3 per cent rise, according to FE Analytics.
“We are taking the view that some banks are probably in a position where they don’t need to raise additional capital,” he said.
“The fundamentals of the businesses have not really improved yet, but we are positioning for their eventual recovery.”
The manager said the Italian bank was a “blue-chip stock” with a very strong funding structure, yet it had “not done hugely well” compared to its peers.
He added the Greek stock exchange so he could access financials in the country without holding a company with the same capital concerns as banks.
“Most stock exchanges are quite good cash generators and so that is the type of stock we look for in a market where there are worries about liquidity,” Mr Yakas added.
