The scare has moved into France, as yesterday Credit Agricole cut its second-quarter profit nearly in half as the French bank became the first major foreign shareholder to report its loss in Portugal’s biggest banking scandal. However, the Espirito Santo scandal seems to have had little impact on European markets.However, FE Alpha Manager Rob Burnett says a rally in European equities is “imminent” - particularly in the banking sector.
“I anticipate a rally in the next two to three weeks on the back of what the ECB are doing. The market can’t go much lower. A rally is imminent,” he said.
“You’ve got to buy the dip, maybe there’s a bit more of a dip but you want to participate in a quite sharp rally and take advantage of the red days.”
The manager says banks are about to turn a corner and he’s backing them in a big way in his Neptune European Opportunities fund, with 32.27 per cent of the portfolio allocated to financial stocks.
“I’m massively optimistic about banks,” he said.
“Now is the best opportunity in six months in banks. We should definitely beat a rising market. Even in a falling market we should outperform because banks are so cheap.”
“Even if the market is to go lower, banks for the first time in years will likely outperform on the downside.”
Burnett says the financial sector, especially banks, are in the perfect position to roar ahead, particularly as the European Central Bank (ECB) is about to embark on form of monetary easing, termed TLTRO, where it will be pumping money into the banking system.
“We think [the banks] will get a rerating on the back of this TLTRO,” he said.
“[It’s not exactly QE], but in reality it kind of amounts to the same thing. It’s giving money to the banks and the banks can do what they want with it,” he said.
“It doesn’t fit a dictionary definition of QE but it amounts to a liquidity injection.”
The second reason Burnett thinks the banks are well placed is because the market is unfairly fearful of the upcoming stress tests in October.
The manager says he’s specifically positive on retail banks, particularly those in parts of the periphery such as Italy, where he’s backing Intesa Sanpaolo Bank, Italy’s second largest bank by assets, and Banca Populare di Milano, a cooperative bank headquartered in Milan.
“These banks are really cheap and we think they will pass the stress test,” he said.
Burnett adds that deflationary fears in Europe are overplayed and about to come to an end, a point that makes the backdrop even rosier for financial stocks.
“I think the trough in inflation is happening this month,” he said.
“Inflation should go higher for the rest of the year. Deflation fears are close to abating and we’re about to start recovery from here in the next couple of weeks.”
European markets have headed south since their highs in June and are down 2.84 per cent year-to-date.
Year-to-date performance of index
Source: FE Analytics
While the manager says he’s got a cyclical bias in the banks, he is taking a more defensive view through exposure to utilities and telecoms. These stocks are too cheap for two reasons, he says.
One, Burnett says electricity prices are no longer falling, which means the rest of utilities’ business can start to grow.
In the telecoms space, he argues there is so much M&A activity that it is starting to repair broken business models and drive consolidation in the market.
“The horror show of telecom earnings over the last five or six years is coming to an end. They are so cheap and pay such good dividends. It’s an epic moment for them,” he said.
Burnett holds German electric utilities company RWE, Spanish natural gas utilities company Gas Natural and Spain’s largest electric utility company, Endesa.
The manager says the stocks have done so well recently he’s taking a bit off the table there and reinvesting it in companies like Telecom Italia, Deutsche Telecom and Orange France.
“These companies look great. They’re cheap, have a massive dividend, are secure, safe and they’re performing well,” he said.
Burnett says this dovetail strategy, with high conviction toward a cyclical sector like banks as well as more defensive sectors like utilities and telecoms, should help the fund to perform well in both rising and falling markets.
“When banks aren’t doing so well, the utilities and telecoms are,” he said.
The fund has had a tough time over the short term, shedding 10.52 per cent over the last six months, nearly doubling the losses of the sector and index.
However, since the FE Alpha Manager took over the portfolio in May 2005, the fund is up 157.63 per cent, making it the fifth best-performing fund in the IMA Europe ex UK sector over that period. The MSCI Europe ex UK index made 88.95 per cent.
Performance of fund, sector and index since 2005
Source: FE Analytics
The fund has ongoing charges of 0.79 per cent.
Four funds in the IMA universe hold Neptune European Opportunities in their top 10.
