Have European equities hit inflection point?

At a recent conference in Asia it was suggested now may be something of an inflection point for global markets, a time for the brave long-term investor to begin placing bets on European banks.

But Philip Dicken, head of European equities at Threadneedle Investments, doesn’t quite see it that way. Yes, valuations for pan-Europe are compelling (estimated 2012 price/earnings of 12 times, against a 15-year average forward P/E of 16 times) and he notes that European equities have been oversold versus US equities and are trading at a 12% discount to US 2012 P/E.

“But I would be cautious to say this is the moment you cannot fail to make gains,” he says. “I would not say it was an inflection point necessarily, only because I do not see a quick resolution to things.”

There is no big-bazooka solution to the eurozone crisis, he agrees, with slow decision-making given the many different sets of regulators and politicians across the zone. As a consequence, he expects markets to trend sideways, or within a range, for quite some time.

Dicken confirms it has been a challenging environment for flows, but indicates there was more interest in European equities in the first four months of 2012 than the past two years combined.

Overall Threadneedle has about €91.8 billion ($113.6 billion) in AUM; 70% of its clients institutional. It has 137 investment professionals with a 25-strong European equity team. As a house it has 51% in equities and 37% in fixed income, with the rest in property and cash.

In Europe the firm has eight strategies, comprising four core funds, a yield fund and three small-cap products. All of its products had seen negative returns on a one-year basis to end-May apart from its European Select Fund (+0.6%), but all were beating benchmark indices over 1-10 years.

However, across June and July the FTSE Eurofirst 300 Index rose 9% on the back of positive sound bites from the European Central Bank that it would act decisively in event of a crisis, and this translated into more positive returns for the Threadneedle funds.

Dicken admits it has been a challenging environment for flows, with investors scared off by negative headlines on the eurozone. “Every headline is an excuse not to do anything,” he argues.

But he says the best time to invest is when things feel uncomfortable, and that equity returns are not necessarily correlated to economic growth.

Broadly, the firm’s European equities position is overweight global growth companies and underweight financials on deleveraging concerns and underweight firms with a domestic focus.

He acknowledges there has been some rotation from global growth firms into defensives. It is overweight consumer staples despite quite high multiples.

The top 10 holdings in its pan European strategy as of July were Nestlé, BG, Novo Nordisk, Diageo, GlaxoSmithKline, British American Tobacco, BASF, Fresnius Medical Care, Tullow Oil and Centrica.

But Dicken stresses that while investors are still in risk-off when it comes to European equities, the more who go into passive indexing is good for stock pickers.

“The thing about Europe at the moment is other people are not really looking at the sector, so that is a positive for active managers like us, albeit that it is a tough sales environment,” he says.

Separately, Threadneedle recently announced it had won a mandate to manage $800 million in emerging market equities from StanLib, a Johannesburg-based investment management joint-venture between Standard Bank Asset Management and Liberty Asset Management.

Campbell Fleming, London-based head of global distribution at Threadneedle, tells AsianInvestor the assets will transition from two incumbent managers, whom he declined to identify. Threadneedle’s benchmark for the new portfolio is MSCI’s global index.

No transition manager has been engaged for this process. Where the stocks match those in Threadneedle’s existing flagship EM portfolio, they will be moved in kind. Stocks that don’t match Threadneedle’s own portfolios will be cashed out.

StanLib runs portfolios of South African and pan-African equities, in addition to other asset classes, but it lacks the resources to manage other EM regions by itself. It has ZAR365 billion ($45 billion) of assets. It has other mandates to third-party international firms in global fixed income and multi-manager products.