Emma Wall: Hello, and welcome to the Morningstar Investment Conference in London. I am Emma Wall and I am joined today by Schroders' Martin Skanberg to talk about European equities.
Hello, Martin. So, why do you think people several years on from the crisis are still quite nervous about European equities?
Martin Skanberg: I think most investors have very, very deep memories and we tend to think of politics when we think of Europe. We tend to think of the euro and the volatility that we saw in late 2011, the sovereign debt crisis. I think it takes time to really unwind that in some ways. Actually, business dynamics are more important than politics.
And also, I think, to be fair, I think, there has been a lot of improvement with regards to the ECB, the regulatory environment and the removal of a lot of systemic risks that could've actually impacted a lot of business models very negatively.
Wall: So, do you think that fear is unfounded and investors need to reevaluate how they consider European equities?
Skanberg: I think it's largely unfounded, because we do have the stability of that oversight. When we think about how a bank sit right there in the middle of the economies, obviously, any failures such as we saw in the great financial crisis of 2008 and, to a lesser extent, in Europe in 2011, it takes time before that actually gets removed. I think in terms of the mechanisms, the bail-in mechanisms that have today, I think, in some regards that it's now disconnected from the plight of a sovereigns in some ways.
Wall: Europe is a little behind where we are perhaps in the U.S. and, Brexit aside, the U.K. in terms of recovering and in terms of central bank stimulus. Do you think it is moving in that direction, though, will see an end to quantitative easing propping up assets classes?
Skanberg: No doubt. No doubt, and that's true for Europe as well. Europe is behind the U.S. cycle in so many ways, whether it's technology adoption, whether it's QE, and now, obviously, QT. So, QT [quantitative tightening] is, obviously, happening right here right now in Europe. We are still printing, but it's fading. But you have to look at that interest rate as well, how do you normalise that. Currently, the ECB is running at minus 0.4%. and if you look at some of the peripheral Nordics are much more negative.
So, the yield environment has to normalise, and the reason for that is because parts of the European economy are starting to show signs of overheating. Business confidence levels are exceedingly high when you look at Germany, labour, wage pressures.
But I think the ECB also has to keep an eye on Southern Europe as well, which is clearly recovering in some ways. And so, it's got a difficult balancing act, which is we think it's going to take time for rates to normalise towards zero and then these start yielding positive returns. So, Europe still very much lagging the U.S. cycle, but that's no bad place to be right now.
Wall: So, that's the macroeconomic backdrop but you're, first and foremost, a stock picker, where are you seeing the best opportunities right now for investment?
Skanberg: Clearly, value has struggled in Europe. We're very style agnostic. That's from a factor point of view, I think, that’s where we are sort of effectively hunting. And what we also really, really like are corporate change stories, self-help. Last couple of years there used to be cost-cutting, running fast to standstill and protect the margins. But in today's world, it is radically shifting towards more shareholder returns-focused.
In Europe, we have vast amounts of excess cash earning negative yields. Recycling that back to shareholders, dividends and share buybacks, similar to what we've seen in the U.S. over the last seven, eight years, it's coming to Europe as well.
So, corporate change, de-merger stories, capital allocation, and improved dividend yield is really the type of specific stories that we are targeting. By and large, they tend to be value companies, but they also tend to be big industrial conglomerates that are now effectively making themselves more well-run.
Wall: Martin, thank you very much. This is Emma Wall for Morningstar. Thank you for watching.
