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Five fund selectors reveal eurozone equity picks

Political turmoil, trade wars and changing economic environments are shaking up the situation in Europe

Pierre DeGagné, DBS Private Bank

Location: Singapore

DBS is underweight Europe. As we entered 2018, we were less bullish on  European equities relative to other markets and adopted a cautious stance. While Europe has displayed solid improvements, the upbeat macro outlook has failed to translate into robust corporate earnings momentum.

This, coupled with a persistently strong euro, presents a seemingly ‘lose-lose’ European equity environment. Furthermore, with a preponderance of exposure to old economy sectors and much less exposure to faster-growing sectors (for instance, the technology sector accounts for only 4% of the Stoxx Europe 600 index), it remains our view that Asia and the US will outperform Europe in Q1 of 2018.

Underweighting Europe doesn’t mean zero exposure. For clients with global equity exposure, we would suggest some European exposure, with a focus on high-quality European managers that are picking companies with unique growth drivers independent of market conditions.

We work with high-conviction managers that run funds such as the Jupiter European Growth fund and Alken European Opportunities.

The portfolio manager for the Jupiter European Growth fund, Alexander  Darwall, has more than 30 years of investment experience. He has a razor-sharp focus on finding companies with superior management and differentiated products or services, with high intellectual property and low cap-ex.

Similarly, the portfolio manager and founder of the Alken fund, Nicolas Walewski, emphasises high-conviction and superior names. One example is Wirecard – one of the world’s leading technology payment companies.

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Alice Tan, Maybank Private Wealth

Location: Singapore

We are seeing great opportunities in the European equities space, particularly after the recent correction. The eurozone presents several investment merits, such as broadening economic growth, accommodative monetary policies and inexpensive valuations.

The latest Eurozone Composite Purchasing Manager Index (PMI) was at a 12-year high of 58.8 in January and will accelerate the already strong growth into 2018. The European Central Bank’s (ECB) regular asset purchasing programme, combined with low interest rates, will also support the economy and the stock markets. Lastly, the forward-looking P/E valuation of the EuroStoxx 600 is now close to the 2016 low, presenting a favourable entry level after the recent rout. Sectors we favour include financials, as many of them are still trading below their book value with improving prospects, and integrated oil and gas players due to their generous dividend payouts.

We favour the Allianz Europe Equity Growth fund. The fund aims at long-term capital growth by investing in European equities with a growth investment style. The key to their performance is the selection of structural growth stocks. The stocks are selected based on three elements, namely high-quality, structural growth drivers and valuation. The fund is managed by Thorsten Winkelmann, a Citywire AA-rated manager with 20 years of investment experience.

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Bryan Goh, Bordier & Cie

Location: Singapore

The recent history of the eurozone’s economy has been fraught, and the recovery is just over a year old. The case for European equities is four-fold:
1. European equities are cheaper than most developed markets
2. Although the ECB will stop net asset purchases in September, they may not
normalise for some time
3. Interest rates remain low
4. When the ECB does raise rates or normalise, it could give the economy,
especially the banks, a fillip

However, the case for caution is also four-fold:

1. There has been little structural reform
2. The political risk has subsided but much is unresolved. The Italian elections have created uncertainty, Catalonia’s situation is unresolved and the AfD now have 13% of seats in the Bundestag. Populism and the far right remain latent. Brexit will add uncertainty and deprive the EU of its pro-business lobby
3. The euro’s strength is good, until it gets too strong
4. The eurozone is quite reliant on trade and 2017 was a rebound year. If a trade war resumes it could hurt Europe

Meanwhile, opportunities in Europe include bank balance sheets, which have been restored, facilitating loan growth. Similarly, profit margins are improving.
Some funds that we are positive on include the Algebris Financial Equity fund, the Cairn Capital Subordinated Financials Fund II and the BlueBay Financial Capital fund.

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Rohit Bhuta, Crossinvest Asia

Location: Singapore

The eurozone is finally showing signs of long-awaited growth nearly a decade on
from the global financial crisis and the continent’s sovereign debt crisis. The PMI
over recent months has been at an all-time high and falling unemployment is buoying consumer spending in the EU. On the back of this growth, and to stimulate its momentum further, the EU is embarking on a number of reforms, including implementation of a unified eurozone budget and the proposed abolition of the ECB’s restrictive 2% inflation ceiling mandate. We are of the view that the eurozone’s growth story is likely to be more sustainable over the long term if the reforms are successfully implemented.

While we believe in the EU’s growth trajectory over the medium to long term, there are a number of short-term headwinds. Italy’s election has produced a hung parliament due to a change in the electoral law. In addition, the nationalistic EU states of Poland and Hungary have opposed some proposed EU reforms aimed at transferring more power to the Brussels institutions, leading to a growing split between the liberal core of the EU and the more nationalistic eastern states.

While we monitor these short-term developments closely, we believe in the overall long-term growth story and have invested accordingly on behalf of our clients.

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Karim Mrani-Alaoui, Single-family office

Location: Singapore

European macro data is indeed showing signs of vigour, which you can credit
to a long-awaited catch-up effect, the positive results from the 2017 elections or
the synchronised global growth we are currently enjoying.

Europe is more robust and wealthier than we thought possible over the past few years, and its companies have learnt to manage their businesses efficiently in difficult environments. Even so, they still trade at reasonable valuations.

While still low, inflation is on the right track and the days of austerity seem to be replaced by talk of targeted infrastructure spending. However, some factors are concerning. A stalling political scene in Italy is one of them.

Also, the eurozone is an export powerhouse, and the headwinds currently faced by international trade could be potentially devastating for some segments. More than ever, equity fund managers need to be discriminating in their stock picking.

We have therefore reallocated our exposure towards the Concorde Leaders
Portfolios fund, run by boutique manager Sunline. It invests into Listed Holding
companies, mostly family-run, which have empirically shown more resilience and an increased ability to allocate resources. Their inherent diversification and the discount to NAV at which they usually trade are very desirable features.

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