The strength and longevity of the European recovery is currently intensely debated, with some commentators warning, counter to Bennett's hypothesis, that the economy could be dragged back into recession, or worse still, deflation. Neil Staines, head of research at ECU group recently told FE Trustnet investors need to take into consideration the very real possibility of deflation in the eurozone and prepare their portfolios.
However, Bennett says there is disinflation in the system but this has been observed over several periods in Europe since 1990 without it resulting in a full blown deflationary cycle.
Deflation is a negative rate of inflation whereas disinflation is a falling positive rate of inflation.
In an environment of improving economic growth, a falling inflation rate is in fact desirable, he argues.
“Talk of deflation is obscuring income-orientated investors from grasping an opportunity seldom seen, with the dividend yield on equities still greater than that offered by both government and corporate bonds,” he said.
“Scare stories over a non-existent deflationary demon, which in any case is largely irrelevant to economic growth, corporate profits and stock market returns and are an unhelpful distraction to the main stock market opportunity.”
The latest numbers show eurozone inflation fell in February to 0.7 per cent, from 0.8 per cent in January.
Over the period equities have risen 0.35 per cent.
Performance of index since Jan
Source: FE Analytics
“During the 1990s, Europe enjoyed a decade of disinflation, with the inflation rate falling steadily from 3.9 per cent at the beginning of 1991 to 1.8 per cent by the end of 1999,” Bennett said.
“In fact at the end of 1998, the inflation rate fell to 0.8 per cent – exactly the same level as today’s rate.”
Europe’s economic growth is improving, inflation is falling and earnings are rising, Bennett says.
“Equities offer income investors the one thing that bonds don’t – exposure to growth. Dividends are a function of earnings and as earnings rise, so too do dividends.”
Eurozone equities have had a good year with the Dow Jones EuroStoxx 50 returning 12.71 per cent, beating the returns on European sovereign debt over the same period, which was 2.27 per cent.
“This year dividends in Europe are expected to grow by 8 per cent as a direct result of earnings being expected to rise by 13 per cent.”
“Indeed, following three years of double-digit earnings downgrades for the market, this year is the first year where earnings expectations have been upgraded, and where in Argonaut’s opinion forecasts of profit growth are credible.”
Performance of indices and sector over 1yr
Source: FE Analytics
Bennett is the deputy manager of four funds, with FE Alpha Manager Barry Norris heading them up, the largest of which, the £220m Argonaut European Alpha, has outperformed its sector and benchmark over three years. Bennett, has only been in place at Argonaut since January 1 2013.
Performance of fund vs sector and benchmark over 3yrs
Source: FE Analytics
Bennett also thinks the falling rate of inflation may be caused by disruption to the worst hit peripheral European states.
“The disinflationary environment has been acutely focused in the periphery, and may merely be a reflection of southern Europe’s increasing competitiveness after a period of painful internal devaluation due to the prolonged recessionary environment.”
The effects of lower wages, lower public spending, lower house prices and fewer imports would create the appearance of deflation, he says.
“The only country to have actually experienced deflation for more than one month is Greece; here inflation turned negative in March 2013.”
“This was in fact a necessary evil in order for the country’s economy to regain competitiveness in the absence of having its own currency to deflate.”
“In addition, lower inflation in northern Europe may just be a reflection of declining commodity prices or the rise in the euro.”
“All things considered, these factors would point to an enhanced level of prospective corporate profitability under more benign economic conditions – conditions currently evolving in Europe.”
The clean share class ongoing charges on Argonaut European Alpha are 1.15 per cent and it is available through Trustnet Direct.
