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Analisi 15.03.2016

Opportunities in European equities

Opportunities in European equities

The need for income in challenging markets - Every manager’s conviction is tested in times like these, with the start to 2016 especially showing how it is always difficult to predict how macro issues will effect investments.


In volatile markets many managers may be tempted to change their strategies, yet there is not always sufficient information to warrant it. In such a context, it is actually often better to just need to sit tight and not panic.

In markets such as these, investors should be looking towards income strategies that can provide returns that other, riskier strategies cannot. With the obvious caveat that “equities are equities” and come with some inherent risks, there remain opportunities to find stocks offering sustainable income, even if yields are slightly lower. Those companies that tend to have very strong balance sheets will also be quite cash generative, an important consideration for investors who in such an uncertain environment should not rely solely on the capital appreciation of their shares.
Income strategies are, due to the nature of these types of stocks, often seen as defensive funds. This however is not always true. Within income funds there are cyclical stocks which, because of the balance sheets of big businesses, are less volatile and tend to be lower beta than the market generally. Because of their balance sheets and cash generation, these businesses tend to be those that can get themselves out of trouble, have the ability to restructure and potentially take advantage of distressed peers that have not got the same balance sheet backing. Against general market stocks, those that can generate a consistent income are really appealing in troubled times.

It is clear that investors and managers are in a more dangerous phase in the market than has been seen for a long time with regards to dividends. There has been a relative benign backdrop for the last few years, which has potentially made investors a little complacent about companies’ ability to pay dividends and an assumption they will just continue to do so. But, after this recent January, there will be an increasing number of companies that find it very difficult to pay their dividends out of cash. Paying dividend debt is not sustainable so it will be harder, but more important to select companies with strong balance sheets. Managers will need to be more vigilant in this context.

European companies are, on average, still trading below peak levels of profitability which their US counterparts are not. Valuations do not look expensive but also do not look overly compelling. Europe is at a different stage of monetary policy which leads to the benefits and opportunities of having a weak currency. Added to this low oil prices should be helpful for both European exporters European consumer. Therefore any recovery in Europe that is consumer-led can continue to make progress even in the face of slower global growth. In many ways Europe is better placed than almost any other geography to negotiate its way through this phase.

With Victoria Leggett, Fund Manager, and Scott Meech, Senior Portfolio Manager, introduced by Jean-Luc Eyssautier, Senior Investment Specialist.

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