After strong returns from the depths of its 2011, Europe has been red-flagged by several managers and analysts in recent weeks as being at risk of a sharp correction.
The latest wave of concern spread quickly through markets earlier in July after it became clear one of Portugal’s largest banks – Banco Espirito Santo – had huge hidden losses on its balance sheet.
McDaid, a fund of funds manager, says rather than selling down exposure he has diversified his European book with the JB Euroland Value Stock fund.
“The Banco Espirito Santo news did cause a wobble in markets, but only briefly. Issues within the group have been flagged for a while, for instance problems with its Angolan loan book have been evident for months,” McDaid said.
“When the [Portuguese] news became more main stream in mid-July, it did not act as a catalyst for us to sell down our European allocation. I don’t think it will detract from a Portuguese recovery.”
“Instead, we diversified our European exposure to incorporate a value driven manager to run alongside a more growth oriented fund.”
McDaid runs GAMs multi-manager range alongside investment director Charles Hepworth.
Hepworth says they bought the €70m JB Euroland Value Stock fund, managed by Ulrich Hans Jost, to sit alongside the five crown-rated GAM Star European Equity fund run by Niall Gallagher.
GAM Star European Equity has been a strong performer for McDaid’s portfolios, but says its exposure to growth companies, which has led the rally over the past two years, has led them to pick a manager who focuses on cheaper areas of the market.
“GAM Star European equity is running a slightly higher risk to our benchmark than was advisable; there was a bit too much style risk on the table,” he said.
“Jost has a different style compared to Niall with much more of a focus on the recovery in Europe and a bit more towards peripheral Europe. Things that have really fallen out of favour and been really punished.”
Peripheral Europe had a strong 2013, but Portuguese, Italian and Spanish equities are still down versus wider Europe and the MSCI AC World index over a three year period, thanks to their dreadful run in 2011 and 2012.
Over the past month the MSCI Portugal index has plummeted on concerns surrounding Banco Espirito Santo and is currently down 8 per cent over a month.
Other markets in peripheral Europe, such as Spain, Italy and Greece also fell significantly. By comparison the MSCI AC Europe index is marginally up over this period.
Performance of indices over 3yrs
Source: FE Analytics
JB Euroland Value Stock has been managed by Jost since May 2012. It has a concentrated portfolio of 30 holdings, mostly a mixture of European blue chips such as Societe General and Spanish banks such as Santander.
Since Jost took over as manager of the fund in May 2012 it has returned 73.3 per cent, compared to 55.69 per cent from its MSCI Europe ex UK index benchmark.
Performance of fund vs benchmark since May 2012
Source: FE Analytics
The panic caused by Banco Espirito Santo led some managers, including Hermes’ Fraser Lundie, to argue that “cracks were appearing in the European recovery”.
McDaid thinks this is a short-term way of looking at the issues however, and thinks the recent pullback is a mere blip.
“European economic growth has been better than my expectations this year, particularly in the periphery. Spain saw the highest level of consumer confidence since 2001 and Greece saw a decrease in unemployment and a significant rise in economic sentiment,” he said.
While McDaid and Hepworth have a positive outlook for Europe, they say uncertainty will hang over the European market for the next few months until the results of the asset quality review are released.
“With the asset quality review results due in October, it is likely that we will see a bit more uncertainty over the coming months; however European equities remain cheap relative to US counterparts,” said McDaid.
Skerritts’ Andy Merricks is also sanguine about the outlook for Europe despite the recent news from Portugal, believing a further banking crisis is unlikely.
“The European Central Bank has baulked up its stress-testing of European banks, and what happened to Espirito Santo was exactly what the asset quality review was designed to do – namely flush out the skeletons in the cupboard,” Merricks said.
“It appears that most of the European banks are adequately covered and those that fail – such as the Portuguese one – will not pose a risk to the system.”
