RLAM’s Wilkinson: Value has disappeared from Europe

The “extremely good value” in the European equity market has largely disappeared in the short term as the region has become “overbought”, according to Royal London Asset Management’s Neil Wilkinson (pictured).

The manager of the £595.2m European Growth fund said there had been a strong rally in cyclical stocks recently, driven in part by the Federal Reserve’s shock decision not to reduce the size of its monthly bond purchases as part of its quantitative easing programme.

But he added that less economically sensitive stocks, including utilities, had also been driven up in price because of large amounts of money flooding into European equities, which meant value in the market had been impacted.

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He said the market had re-rated amid a general increase in risk appetite and the piling in of US institutions, which meant European stock prices had “gone from extremely good value to reasonable value”.

“It’s clear there has been a fairly aggressive rotation,” he said.

“Many utilities were out of favour but have done very well, although it is hard to find these companies at a reasonable price.

“I am still reasonably upbeat about Europe in terms of the next 12-18 months although it looks overbought short term.”

During the summer, the manager raised his exposure to economically sensitive stocks in the fund, increasing exposure to financials and car manufacturers, a trend he said he was looking to continue as he didn’t want to get left behind as the market continued to get pushed up.

The manager said he had taken a renewed interest in Spanish banks because they were “less worse” than they had been previously, given the renewed strength of the eurozone, although he only sees value in regional banks.

“Peripheral financials where most people hold an underweight position have been performing very strongly,” he said.

“If you are of the view things are getting marginally better in Spain, the banking sector is the obvious place to look, but Santander and BBA look quite expensive already.”

In one year, the European Growth fund has risen 23.6 per cent, narrowly underperforming the IMA excluding UK sector rise of 26 per cent, according to Fund Analytics.

In three years it has risen 22.6 per cent, compared to 28.5 per cent for the sector, and in five years it has narrowly outperformed the sector with a rise of 54 per cent.