Where the smart money invests
There are numerous reasons to be bullish on European stocks.
there are many reasons to invest offshore, and the current level of the rand offers a “fantastic opportunity” to take money out of the country, says Ryan Friedman, head of Investec’s multi-manager business in South Africa. His reasons are threefold: investing offshore provides a hedge against a highly volatile emerging-market currency; it allows investors to diversify assets into uncorrelated markets abroad; and provides investors with a much greater selection of assets to invest in.
Investec’s multi-manager business, which has $1.6bn invested in global multi-manager funds and invests across a range of equities, fixed income, property and hedge fund instruments, is currently particularly bullish on Europe. Economic data out of Europe is looking much better, with first-quarter GDP growth of 1.7%, exceeding the 0.7% achieved by the US.
The banking system has also stabilised and looks a lot healthier; valuations in Europe are about 20% cheaper than in the US; and European companies have been reporting strong earnings growth, he says. “That’s going to provide impetus for share prices to run and hopefully close the gap between the valuations of US and European companies.”
Richard Cardo, lead SA portfolio manager of Investec’s Global Leaders Portfolio, which invests in global companies that are listed in the US, UK and Europe, is also bullish on the region. The portfolio currently holds 36 stocks, with about 23% of the portfolio exposed to the technology sector. “We like the positive cyclical and secular growth trends [in technology], particularly around new areas of growth such as the move to the cloud, mobile data, the Internet of Things, evolution of digital payments, artificial intelligence, etc.,” says Cardo. It holds stakes in Alphabet, Amazon, Cisco Systems and Facebook, and remains well exposed to the emergingmarket consumption growth story, with about 23% of the portfolio invested in companies like Colgate-Palmolive, Johnson & Johnson, Diageo, Unilever and LVMH. The portfolio has been increasing its exposure to select European stocks, Cardo says. Recent purchases include industrial group Atlas CopCo and healthcare and agricultural group Bayer. “Of the defensive sectors, we prefer healthcare and pharmaceuticals the most – these are less sensitive to interest rate hikes, have superior earnings growth and more attractive valuations, and technological and innovation advances provide long-term growth opportunities.”
With global growth aligning for the first time since the global financial crisis, Friedman says cyclical sectors of the market are set to do well. “Materials remain quite cheap; energy has been beaten up a lot recently and looks quite interesting.”
The financial sector (less cyclical than materials), for example, is also worth a look. “Financials got sold off aggressively after the global financial crisis”, partly as a result of huge fines and more onerous regulation.
“We think the regulatory burden is going to ease, plus you’ve got net interest margins picking up, and some of the banks are trading at very cheap multiples relative to other sectors. In an environment where better economic growth can lead to a pick-up in credit extension and where yield curves are steepening, we think it will be beneficial for the banks.
“We like European banks specifically, and we think that’s an interesting trade following their recent sell-off.” firstname.lastname@example.org Head of Investec’s multimanager business in SA