Rob Morgan is the Pension and Investments Analyst at Charles Stanley Direct:
It is easy to paint a picture of gloom in Europe, a region burdened by sovereign debt problems that has shown precious little growth since the financial crisis. However, there are now signs it is poised to recover spectacularly according to Rob Burnett, manager of the Neptune European Opportunities Fund.
Clearly, this is not a popular opinion, which is why it makes it interesting - most investors' view of Europe is still pessimistic, so any good news could lift the market. Yet things have been gradually improving. As Mr Burnett points out, current account balances (the difference between imports and exports) have been improving rapidly for the European periphery.
As a result, borrowing costs have fallen dramatically. Effectively many nations are now accumulating wealth and are viewed as a better ‘credit risk', even though many governments are still spending more than they collect through taxation. Exports remain firmly on the increase owing to falling labour costs, whilst imports have collapsed partly due to austerity measures. Ordinarily a country's currency would devalue during a debt crisis, thereby keeping the country competitive, but due to the European single currency, a reduction in wage costs has had to occur, clearly something that doesn't happen overnight. According to Mr Burnett, though, after years of divergence between Germany and peripheral Europe, competitiveness is now converging meaning growth across the continent in 2014 will surprise on the upside as a result.
Mr Burnett is particularly bullish on banks. These would be a major beneficiary of rising economic activity, as well as the paring back of austerity, which he argues will soon end as it has largely done its job. Business confidence has also risen lately, and he argues the German economy in particular is set to enter a powerful growth phase. Mr Burnett is therefore keen to include industrial companies such as truck maker Volvo in the portfolio. Indeed, he is particularly positive on the auto sector generally, arguing that car sales across much of the continent have fallen sharply over the past decade and are due a rebound. Amazingly, according to Neptune's research, Spanish and Italian domestic car sales are down at levels seen in the 1960s.
If Mr Burnett is correct, a turning point in Europe could spell a major opportunity, though there is always a chance political events could derail such as rosy scenario. Valuations in some areas appear to be on the investors' side. He believes defensive companies in sectors such as consumer staples have grown rather expensive, leaving more economically sensitive areas such as banks and auto manufacturers far better value with little good news priced in. By way of an extreme example, Mr Burnett points out French consumer giant L'Oreal is four times as expensive as French bank Credit Agricole measured on a price-to-earnings basis. He admits L'Oreal should be more expensive, but argues the valuation gap is too big, and the banking sector offers a far more favourable balance of risk and reward currently.
It is fair to say this fund has struggled in the past 18 months, not helped by some poor stock selection and some "off-benchmark" positions in the US. Yet the bailout of Cyprus in April marked a major turning point. The fund has outperformed since, not surprisingly given the manager's bullish views. With a high conviction, concentrated portfolio run by a manager with his foot firmly down this fund could really shine if Europe does indeed enjoy a renaissance. Whilst the fund is not currently part of our Foundation Fundlist of preferred funds across the major sectors we are monitoring it with interest.
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