Europe is likely to continue to face headwinds over the long term and isn’t cheap on a forward-looking basis, according to Rathbone’s David Coombs (pictured), despite the region recently capturing the attention of many. 
The head of multi-asset investments believes that a combination of diverging fiscal policy across the region as well as a failure to recover from the financial crisis has curbed the appeal of the popular market.
Over recent months, there has been a bullish sentiment surrounding Europe, following the use of quantitative easing from the European Central Bank (ECB) to jump start the economy.
Performance of indices in 2015
Source: FE Analytics
As such, many investors believe there’s plenty room for growth in the region and that valuations are reasonable when considering the proposed boost that printing money will give the economy.
In fact, in an article last month, FE Trustnet explored whether Europe was becoming too popular and whether it has become another example of consensus trading, following the region’s surge in popularity.
Tom Becket, chief investment officer at Psigma, said: “I think there are good reasons why [Europe’s success] can continue. Broadly, we think that most investors are still talking the talk rather than walking the walk when it comes to European and Japanese equities, and there is still considerable amounts of further buying that can take place.”
“In simple terms, borrowing costs are low, companies are focusing much more on their necessary operations rather than employing useless people, they’re starting to focus more on their balance sheets, they’re starting to pay higher dividends and the cheaper costs and improving sales should lead to decent profitability.”
However, Coombs believes that the political headwinds facing Europe have made the market unappealing and the situation probably won’t be resolved any time soon.
“If suddenly I saw Europe was on six times earnings and there was a bout of fiscal harmony across the eurozone then I might get excited, but hell might freeze over before that happens. I can’t think of any catalyst to change my strategy at the moment,” he said.
“I think the European situation is a long-term problem. I think that the failing by Europe to comprehend the problems of 2008 in terms of the lack of cohesion among fiscal policy will continue to be a headwind to European economies for the next five years or more, because I just cannot see the political will to do anything about it.”
Culturally, the manager believes that it will be difficult for Europe to achieve a mutual agreement in terms of government revenue and expenditure across the board.
“It might not be Greece next time, it might be Spain or France – who knows, but I think that’s a massive headwind to investing in Europe,” he added.
Despite believing that Europe is unattractive as a whole, Coombs is seeing some opportunities in Germany. In his Strategic Growth Portfolio fund, he has a 4 per cent weighting in the country, as well as a 1 per cent weighting in Spain.
In spite of the Greek debt crisis and a growth slowdown at the start of the year, German demand and production in the industrial sector has been improving in the country, according to a statement released by the finance ministry this week.
German exports also increased in April and May, and growth was predicted to have risen by approximately 30 basis points in this year’s second quarter.
“On a three to five-year view, Germany has got interest rates that are far too low for the strength of its economy and it’s got that weakening currency that supports its exporters, so I think Germany is in a unique position and set to do well,” he explained.
“Germany looks very interesting because of the structural problems around it. I’ve got a 1 per cent weighting in Spain because I just see that as a hedge on my view. If I’m wrong and everyone gets really excited about Europe, the Spanish market will benefit. But the core is the German position.”
Coombs says that, because of the economic differences in countries across Europe, sector allocation is now more important than regional allocation.
“I do think that German companies have the huge tailwind of the low cost of capital, so there are still geographic issues, but whether Europe as a huge blob of a region is still appropriate to allocate to, I’m not convinced. That’s why I’m moving towards individual countries,” he said.
“I’m becoming increasingly suspicious of these large sweeping asset allocation calls on a geographic basis. Is Google an American company or a global company? Rio Tinto is a listed UK company but is it a UK company? I just think that sectors are becoming increasingly more important than geographies.”
“European and emerging markets are big regional blocks and I’m starting to think that this has less relevance, to be honest, going forwards.”
However, the manager believes that the US market is a different story and that the country’s consumer sentiment and economy in general are among the strongest in the world.
As such, he has a long-term US overweight in his Strategic Growth portfolio with a three to five-year view.
Similar to his views on Europe, Coomb’s bullishness on the US market conflicts with the consensus, following valuations in the region that many investors deem to be overstretched.
Performance of indices over 5yrs
Source: FE Analytics
“On a long-term view, I still think the US is the place to invest – I don’t think that Europe looks cheap versus the US on a forward-looking basis,” he argued.
“The US has a far better choice of companies to invest in such as, being simplistic, Google, Disney and Coca Cola. Yes, the US market is priced at a premium but I think it deserves that premium. I think it has a great depth of quality and that’s a long-term view for me.”
Coombs’ biggest holding in Rathbone Strategic Growth is the Legg Mason ClearBridge US Aggressive Growth fund, managed by Evan Bauman and Richie Freeman.
Over three, five and 10 years, the five FE Crown-rated fund has been in the top quartile, comfortably outperforming both its Russell 3000 Growth benchmark as well as its average peer in the IA North America sector over five years.
“ClearBridge has a bias to healthcare and that’s another long-term call for me as well,” Coombs explained.
“There’s no doubt about it that its portfolio isn’t cheap at the moment and I wouldn’t be adding to it right now, but I’m also not looking to reduce it. I do think you’ve got to pay up for quality.”
Rathbone Strategic Growth Portfolio has returned 38.95 over five years compared to a 35.74 per cent average gain in its peer group composite, as defined by FE’s sector rankings of risk-managed funds.
Performance of fund vs peer group composite over 5yrs
Source: FE Analytics
The £97m fund has a clean ongoing charges figure (OCF) of 1.54 per cent and yields 1.19 per cent.