European equity investors shouldn’t fear market uncertainty despite the concerns raised by ongoing Brexit negotiations, according to Janus Henderson manager Nick Sheridan.
Sheridan, who manages the €2bn four FE Crown-rated Henderson Horizon Euroland fund, said the UK vote to leave the EU had yet to have a significant impact on markets.
Since the referendum last year, although sterling has slumped, UK economic growth has remained positive albeit at lower levels compared with other developed economies, as the below chart shows.
Source: OECD
Sheridan said: “Economists have struggled to agree how large the impact might really be, although consensus estimates for UK growth since the vote have been less damning than many expected.
“The UK has been helped by record-low interest rates, which make it easier to borrow money, and encourages spending and investment, although the Bank of England will need to consider the long-term impact of such accommodative policies.”
However, while the UK economy has looked under greater pressure since the referendum, conditions in the eurozone have improved significantly.
Purchasing managers indices (PMI) data – which are used to assess the health of the manufacturing sector and are a measure of business conditions – reached a six-year high in June and August.
“This suggests that we are in the best economic environment in Europe for years, although these estimates do not take into account the impact of Brexit negotiations,” said the manager.
“Discussions between Michel Barnier – the EU’s chief negotiator – and David Davis for the UK are at a crucial stage.
“A poor outcome for the negotiations could negatively impact both sides, although investors, thus far, remain calm.”
According to the latest figures from the Investment Association, there have been net inflows of £1.4bn into the IA Europe Excluding UK sector since the start of the year – the second best-selling sector after IA Global – with £504m being taken in August alone.
Meanwhile, in markets there has been little evidence of a Brexit-related impact with European companies becoming much more popular among fund managers.
Part of the attraction for European equities, as well as the healthy economic outlook, has been the improving fundamentals.
Indeed, the most recent Bank of America Merrill Lynch fund manager survey noted that macroeconomic data painted an encouraging picture for the European earnings outlook.
“Sentiment on Europe rose with the overweight in eurozone equities back near record highs and earnings per share expectations accelerating,” the bank noted recently.
Accommodative policy by the European Central Bank (ECB) has also reinforced sentiment with the reduction in its asset purchase programme still supportive of markets.
Low levels of market volatility have also increased the attraction of European equities. As the below chart shows, volatility in the Euro Stoxx 50 Volatility index, a common measure of market uncertainty has remained at much lower levels than at previous crises in recent years.
Source: Janus Henderson Investors
Sheridan said: “Volatility in European equities remains below its long-term average, and far below where it was during the global financial crisis and subsequent European sovereign debt crisis.
“This, in part, reflects strong corporate results in Europe, but there are risks that investors should keep in mind.”
The Janus Henderson manager said this was partly due to the greater level of tolerance investors now have towards the potential risks of higher debt in an environment of long-term low interest rates.
“This might be a problem when bond yields start to rise, a likely consequence if interest rates in the UK and Europe move up from their current levels, or the ECB begins to taper its monthly bond purchase programme – as part of ‘quantitative easing’,” he said.
“This could lead to higher volatility in markets, as investors consider the potential consequences for those companies that have gorged on cheap borrowing, and face higher costs in repaying those debts.”
As such, the manager said that the current market uncertainty dogging markets “is not something to be feared, providing an opportunity to invest in good companies at potentially attractive prices”.
He added: “For the time being, however, a period of lower market volatility should enable investors to concentrate on improving company fundamentals.
“It has been a long time coming, but we are finally starting to see a steady flow of positive earnings coming through in Europe, with many companies meeting or exceeding expectations for their profits.”
The growth-oriented Henderson Horizon Euroland fund invests at least 75 per cent of its total assets in companies incorporated or having their principal business activities in eurozone countries.
Among its largest positions are oil company TOTAL, which represents a 4.1 per cent holding in the portfolio. Other top holdings include consumer goods company Unilever and luxury goods firm LVM Moet Hennessy Louis Vuitton.
The biggest sector position is industrials, making up 22.3 per cent of the fund’s holdings, while financials represent a further 21.1 per cent.
The fund’s largest country exposure is to France, which accounts for 37.8 per cent of the portfolio, followed by Germany (21.2 per cent) and the Netherlands (16.0 per cent).
Since Sheridan took over the Luxembourg-based Sicav has in November 2011, the fund has returned 157.98 per cent compared with a 119.05 per cent rise of the benchmark MSCI EMU index.
Performance of fund since manager start
Source: FE Analytics
The fund has an ongoing charges figure (OCF) of 1 per cent. It also carries a 10 per cent performance fee on gains achieved above the benchmark.