Concerns caused by the Brexit vote could actually result in further accommodative monetary policy in Europe and therefore a more positive investing environment, according to Chris Hiorns (pictured). 
The manager, who heads up the EdenTree Amity European fund, says that the region is not without its faults and is battling a series of unforgiving headwinds but is likely to be one of the better-performing markets over the medium term.
He also warns that it is important to be selective in the region though and favours sectors such as real estate, telecoms and basic materials while he is cautious on banks and insurance firms.
“I think strangely enough, Brexit may well have encouraged European policy makers to pursue more expansive accommodative macroeconomic policy just as it has done in the UK,” he said.
“We’ve seen very swift action from the Bank of England and in Europe we’ve seen European policymakers try to promote more growth in Europe as a result of it. They are concerned Brexit will have a negative impact and that should have a big impact in itself.”
Hiorns is increasingly optimistic that the European Central Bank is doing everything it can in terms of monetary policy and points out there has been a slight slowdown in austerity measures, which he says is a positive overall.
Performance of indices in 2016
Source: FE Analytics
While this has boosted the performance of equity markets though, the implementation of ultra-loose monetary policy has also unnerved many industry professionals.
In an article published yesterday, managers at Rothschild, Ruffer and Troy all warned that such experimental moves by central banks could lead to serious problems over the long term. Jim Wood-Smith, head of research at Hawksmoor Investment Management, called current market behaviour caused by loose policy “diabolic” and “massively unhealthy”.
“I think negative interest rates are a bad idea, I think it does more damage to the banking sector and the financial sector than it does benefit the wider macro economy. I would agree with Mark Carney who said he doesn’t believe in negative interest rates. I also think the ECB is running out of options quite quickly in terms of monetary policy. They’re running out of government bonds it can buy because yields are becoming so negative.” Hiorns admitted.
“In the corporate bond market, we’ve seen spreads go down to very low levels as well and I do believe it’s possible we’ll see alternative policies from central banks. In Japan, you’ve seen that QE has moved onto the purchase of equities and I think it is a logical extension. I think it is a possibility.”
“Also, maybe infrastructure is an area they might consider increasing spending on and trying to use that to generate growth as well.”
The manager adds that European Union president Jean-Claude Juncker has delayed sanctions against Spain and Portugal over their high levels of public debt, indicating that the organisation is on the path to bolstering the regional economy as much as possible.
“There is some sort of sense that Brussels is becoming a bit more lenient, particularly after Brexit – they’re trying to help pull things together,” he continued.
“Another unexpected result of Brexit is that France has decided to cut taxes on financials, so that may be positive in terms of the overall economy as well.”
Another reason Hiorns is positive on European stocks is that the low and negative bond yields in Europe have meant that European equities look materially undervalued, especially given the number of defensive, dividend-paying growth stocks available on the market.
Performance of sector vs index in 2016
Source: FE Analytics
However, the manager’s portfolio has far more of a value tilt and holds assets that he deems to be underappreciated by the market, given their long-term potential. Examples of the fund’s largest holdings include packaging company Smurfit Kappa Group, French tire manufacturer Michelin and German chemical company Merck Group.
“In many ways, if you have a time horizon of more than a few years, I would say that the equity market looks far less risky than the bond market at the moment,” he said.
“Where the bond market is in terms of long duration, it looks very unattractive and as though it could be very volatile.”
In terms of being able to find attractive buying opportunities, Hiorns says he is positive compared to previous years despite admitting that the macroeconomic background is challenging.
“This year there are a lot of problems that have gone on. There is Brexit, in France the French floods had a noticeable impact on production, concern over terrorism attacks has impacted the economy there as well especially in consumer-facing industries. There are problems over Schengan where the borders were closed which was also negative – the banks themselves aren’t looking to be in very good shape and that has created quite a lot of difficulties,” he explained.
“However, I think the opportunity set is better than it was a few years ago. Obviously the equity market has moved up somewhat but it’s still very cheap compared to bond markets and there is a strong disconnect between bond prices and equity prices at the moment.”
“There is plenty of grounds for optimism there, I think we’re seeing growth come from some of the core economies in Europe now. Overall I am positive on the open equity market; I think it will be one of the better performing markets in the global economy.”
Over Hiorn’s tenure, the four crown-rated EdenTree Amity European fund has return 83.63 per cent, outperforming its sector average and benchmark by 21.47 and 18.02 percentage points respectively.
Performance of fund vs sector and benchmark under Hiorn
Source: FE Analytics
It has also outperformed both its average peer over one, three and 10 years as well as over one and six months.
The £64m fund has a clean ongoing charges figure of 0.82 per cent.