InvestmentsFeb 5 2014

Europe ‘primed for pullback’ in 2014 says Fidelity’s Morse

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“They are not always right and not necessarily the best predictors of future earnings growth but lots of directors are saying people have become overoptimistic about earnings growth going forward so the shares look a bit high. So it looks like a good time to cash some of that in.”

The manager also highlighted a trend in investment trusts which pointed to the potential for the stockmarket to be at or near a high.

An investment trust’s shares often trade at a level lower than the net value of its assets, something which is known as the discount. This means investors often try to buy investment trusts at a discount because it means they are buying a group of assets at a reduced price.

But Mr Morse said discounts had narrowed significantly in recent months. “There are lots of structural arguments why discounts might be less but commentary I saw recently suggested when the average discount gets to 5 per cent, which is where we are now, in the past this has been close to the market top,” he said.

Mr Morse’s own investment trust – Fidelity European Values – was trading at a 10.4 per cent discount last week, according to data from the Association of Investment Companies.

The stocks which dented Sam Morse’s European fund in 2013

Fidelity’s Sam Morse said his investing style was part of the reason he lagged his peers in performance terms, but did acknowledge some stock-specific issues which impacted him.

The manager said he had reduced his position in oil services company Saipem ahead of 2013 but that the company in January reported a “major profit warning” and cut its dividend.

“I sold the stock but it had done quite a bit of damage to the portfolio,” he said.

He added Scandinavian-based stock Swedish Match had begun to lose some market share to competitors - although he saw this as a “temporary phenomenon” - which has prompted the shares to fall from $35 in January last year to $30 now.

The manager said a couple of other big tobacco companies had entered the Swedish market and “became more aggressive at the bottom end of the market”.

“This caused unfavourable dynamics in the market [for Swedish Match,” he added.

Mr Morse also said Umicore, a precious metals recycling company, was also hit because precious metal prices were weak. “In terms of relative performance we had three good years and then a difficult year in 2013, but I am sticking to my approach,” he said.