European equities have been amongst the worst performing of developed markets this year amid ongoing concern that the continent is headed for prolonged period of sluggish growth while worries over it entering into a period of deflation or a similar time to its 2011 sovereign debt crisis linger.
According to FE Analytics, the MSCI Europe ex UK index is down 5.95 per cent while the FTSE All Share is down 4.02 per cent. Meanwhile the S&P 500 and MSCI World are up 6.21 and 1.59 per cent respectively.
Performance of indices in 2014
Source: FE Analytics
Europe has been one of the least attractive destinations for UK investors to place their money with outflows higher than for any other region, according to recent data from the Investment Management Association.
However, Mustoe (pictured), manager of the five crown-rated Invesco Perpetual Global Equity Income fund, told FE Trustnet that negative sentiment to Europe has discounted the valuation of equity markets without presenting material risk to firms’ businesses.“Everyone is talking about a European crisis at the moment, but we’re not seeing that on a company level. It’s a very active debate in the team at the moment – time and time again we’re coming across stocks that are very similar in quality to those in the US, but in many cases you can find them on two-thirds the valuation,” he said.
Since the beginning of September there has been a material fall in stocks around the world but Europe has been particularly hard hit, losing almost 10 per cent since.
Performance of indices since September 2014
Source: FE Analytics
Mustoe says that a breakup of currency bloc is “very unlikely” and that the sell-off is happening because of “investment psychology”.
“I’m not looking at it and thinking we’re going into a recession,” he said.
He adds that in light of the recent correction not only on a relative, but an absolute basis, Europe is looking cheap.
“Europe is starting to look very attractive again. We’ve been adding money selectively recently. It’s been very gradual – we haven’t suddenly swung things around, as we’re not traders,” the manager said.
“We’re doing it because the companies are so strong and valuations are attractive – this isn’t a massive call on European growth. We’ve always taken the view that we’d get subdued growth from Europe, but the share prices are reflecting much worse than that. Even a little bit of growth will see some very strong returns from these companies because of their cash flow durability and dividend growth potential.”
“If you’re a long-term investor, you need to look at these companies and ask whether the recent noise has changed the case for investing in them. For that reason, the case for some companies is incredibly strong. It doesn’t matter what the 10-year bond yield did yesterday – that’s just short-term noise. You’ve got to look through it.”
Europe now represents just under 40 per cent of the £700m fund’s portfolio with the manager ramping up exposure over the past 18 months, as chart below shows, to the third highest in the sector.
It’s very narrowly behind the £22m CF Canlife Global Equity Income and £88m Schroder Global Equity Income funds in terms of European exposure.
Fund’s regional weightings over 3yrs
Source: FE Analytics
Mustoe says European banks look particularly interesting despite the threat of further regulation.
He says Nordea and BNP in particular have very strong balance sheets and have weathered the cost of regulatory shock, with attractive cash flow and dividends.
The manager has been at the helm of the fund since December 2012 but it is “team managed” which provided some of impetus to build a significant overweight in the sector.
“All of the team are rewarded on a total return basis, not on how well their own stock picks perform,” he said.
“That has led us to invest a lot more in Europe recently. We’ve been overweight for a while. The US has done incredible well and though Europe had a good year last year, there is still a huge gap between them in valuations. Valuation is of course incredibly important.”
Since Mustoe took over the fund it has returned 22.77 per cent putting it in the top quartile of the 30 funds in its sector.
The average fund in the IMA Global Equity Income sector made 18.69 per cent. The MSCI World gained more than both the fund and the sector over this period at 25.91 per cent.
Performance of fund vs sector and index since Dec 2012
Source: FE Analytics
IBOSS’ Chris Metcalfe recently told FE Trustnet he preferred the fund to the £9.2bn M&G Global Dividend.
“We like the fact that the Invesco Perpetual fund is smaller,” Metcalfe said. “It is in, what we would class as, the ‘sweet spot’ as the pool of stocks it is fishing in is fine.”
