Investors should think about reducing their UK exposure in the face of impending Brexit negotiations in favour of European equities, according to Janus Henderson Investors’ Tim Stevenson.
The director of pan-European equities said that improving macro, political and earnings growth factors are all reasons that the European market looks more attractive in the coming months.
Stevenson runs the £244m Henderson Euro Trust, which he has managed since its launch in 1992, and said he is glad the fund no longer invests in the UK.
“In 1995, we ditched investing in the UK after speaking to shareholders as they said they didn’t want a European fund to invest in the UK because they had existing UK exposure. So, it was just a duplication potentially of what they already had,” he said.
“The UK went out and has not been back in since and given Brexit and my view of Brexit, I am really glad that we don’t have the UK because Brexit is an absolute car crash.
“I am urging people, if they have a choice, to get the hell out of their UK investments because the UK is going to hit a brick wall.”
He said while some of the larger companies in the FTSE 100 will be ‘shielded’ by some of the effects due to their international exposure, he said the UK as a whole “has a really serious problem ahead of it”.
“There is a lot going on in the UK and I see no reason to be involved in it. The UK is just running away from the issues that it just doesn’t want to face up to, which is typical,” he added.
“On the actual negotiations, Europe undoubtedly knows what it wants and what it can negotiate. The unity and Europe working together is far more important so the UK’s negotiating stance is way weaker than it actually makes out and it is hiding that from people.”
Since the UK voted to leave the EU in June last year, the FTSE All Share has held up fairly well, returning 22.86 per cent, as the below chart shows.
Performance of indices since EU referendum
Source: FE Analytics
However, it has lagged its European counterpart and Stevenson said of the two moving forward, Europe looks like the better place to be invested.
While Brexit negotiations are undoubtedly part of this, the manager said that investors should be more focused on what is actually going on in Europe specifically.
One main argument against investing in Europe is that the currency is politically driven and therefore has the potential to fail, yet Stevenson said the single currency has been a net benefit for the trade bloc.
Stevenson (pictured) said: “You could make the case that the euro is not the disaster that it is making out because it has instilled in Europe that you must run your economy properly. 
“The most testing case was obviously Greece and it has had a really tough time with huge internal devaluations but actually Greece is beginning to turn now.
“The best example of the lot is Ireland which is really strong again after they went through the pain of running the economy properly and blowing it to pieces in 2007 [as it had] far too much debt.”
He said of all the economies in Europe, France has been one of the slowest to accommodate change, but with the elections now behind it he expects new president Emmanuel Macron to continue reform.
“France has been the one that hasn’t addressed some of the issues but is now beginning to and will likely continue to with Macron,” the manager added.
“It takes time but the issues that the UK wants to run away from – demographics, ageing, immigration, technology and all these other things – Europe is basically having to face up to and is doing so united.”
Alongside this, he said the economic outlook in the short-term is much better for Europe than in other markets such as the UK and the US.
“The situation for Europe is much better. You have seen this year more flows into European funds and I suspect that will continue,” he said.
One key reason for this is the trend of earnings, which have improved as the year has gone on rather than falling away as they have done in previous years.
“The actual trend of earnings has improved as the year has progressed whereas in previous years we have constantly said we thought we were going to see a nice earnings growth and it has just faded away,” Stevenson said.
“This year it has actually got better and better as the year has progressed.”
As such, Europe is in a much better position both from an economic point of view and from an earnings point of view but also politically.
“The first breakthrough on politics post-Brexit and Trump was the Dutch being pretty rational and giving the two fingers to Geert Wilders and the French doing the same to [Marine] Le Pen in May and June,” the manager said.
“So, the political situation is much more stable. You have the German elections coming up in September but that to some extent looks a formality.”
However, despite all these improving factors, the market has failed to take off in the way that many expected.
While it is among the best performing markets year-to-date, Stevenson noted that since the election victory of Macron, the market has failed to kick-on.
Performance of indices since French election
Source: FE Analytics
Indeed, as the above chart shows, the MSCI Europe ex UK index is 4.1 per cent higher since the election victory.
“Europe hasn’t actually gone that far. It started off very well but then it faded a bit,” Stevenson said.
“We’ve been going broadly sideways over the last two-to-three months and that is largely because people are rather nervous about the US and whether the market there will continue to run or not.
“The market is also very aware of the fact that there is no way that the European Central Bank [ECB] would talk too noisily about tapering and beginning to calm down on the whole quantitative easing program until after the French election was successfully behind it.
“With the French election behind it and more evidence coming out that European economies are recovering, it is only a question of time before the ECB starts to move away from this negative interest rate policy and I think that is really important that they do so.”
The manager added that negative interest rates have a “weird influence” on economies and as such must end soon. However, markets are nervous about how the ECB decides to begin unwinding its quantitative easing and negative interest rate policies.
“It has to end it is just a question of how we get there and how markets react and that is why one of the things that everyone is keeping an eye on is what is happening in 10-year bond yields,” he explained.
“Morgan Stanley are thinking it will go to 1 per cent and maybe even to 2 per cent: clearly if it goes to 2 per cent that has a big impact on the earnings of banks and interest margins but it also has a big impact on markets overall.
“That potentially creates a bit of nervousness going into the Autumn but it is actually a really good sign so we should be celebrating it.
“I can see why the markets would have a correction in the short term but I would see that correction as a buying opportunity more than anything else and a time for us to utilise our gearing.”