For the first time in five years, this week I met a man who is cautiously optimistic about Europe, and in particular small businesses on the Continent. Step forward Ollie Beckett, fund manager at TR European Growth Trust (TRG).
He is, admittedly, in the sort of job where he would prefer to talk up Europe but he does have knowledge and experience to back up his judgement and his comments are a welcome antidote to the prevailing attitude in the British press, whose commentators have never forgiven the Europeans for launching their own currency without us.
Beckett says his investments are ‘very much Western European’ and he avoids the likes of Kazakhstan mining companies. The holdings are generally trading at a discount to similar companies in the United States and while he accepts that there is good reason, given the advantages that American companies have, for example cheap shale gas for energy supplies, he says: “We live in a globally interconnected world and that gap strikes me as an anomaly.”
Interestingly, he sees small European businesses as taking a less short term view and having more conservative balance sheets than in the UK.
He says: “In Europe there tends to be a family connection and a community connection. Those running the company think ‘I’ve got to walk down this street and hold my head up high.’ This has largely gone in the UK.”
Small European companies, Beckett reckons, are a good way to get into new technology such as detecting gas leaks or laser surgery.
He also has interesting comments on Greece, widely seen as the biggest basket case in Europe but now regarded by himself and other investment managers as an emerging market. He has bought into Titan Cement there, pointing out that “Greek cement is back to 1964 levels and will be down again this year but should be reaching the bottom very soon. There are not many areas of business where you are back to 1964 levels.”
Like me, Beckett never thought that Greece would drop out of the Euro. Beckett takes a more relaxed view than many British commentators on ‘internal devaluation’, the mechanism under which wages are being squeezed in the struggling nations while those in Germany are rising.
Even regional banks in Europe, a central sector in the debt crisis, are showing improvements and he says ruefully: “With hindsight I should have loaded up with Italian banks. There may be a reality check in the short term but they will benefit from the improving economy.”
Banks are also picking up again in Spain, he says. Beckett’s comments go some way to confirming the superficial view I gained from visiting a wide tract of northern Spain earlier this year. I was struck by the absence of beggars or idle youths lounging on street corners, the cheerfulness of the workforce and the lack of obvious signs of extreme poverty. The situation looked far less bleak than you would expect from reading British newspapers.
He is also more relaxed about France, although he is in no doubt that economic reforms are needed. He says: “France is not a hugely leveraged economy. There aren’t a million unsold houses as in Spain. As the global economy starts to improve, France will get dragged up by it.”
Summing up, Beckett reckons that equities in Europe are generally more attractive than in the UK. He says: “The UK has greater equity consciousness. That market never really disappears. In Europe this space got abandoned. People didn’t want equity and they certainly didn’t want small caps. People will return to this space because they are seeking out value.”
Déjà vu in the USA
We’ll meet again, and we do know where and when. Make a date in your investment diary: Monday January 6, 2014. That is when the United States will start to look once more over the financial cliff.
The markets have bounced up and down as hopes of a settlement rose and fell - and indices in the US leapt when a deal was finally struck to fund the government there for the short term - but that was all speculative froth and had nothing to do with medium to long term investment. The FTSE 100 actually fell in its few hours of trading after the deal, so perhaps wiser counsel prevailed.
Congress has agreed to raise the debt ceiling, the maximum amount that the US government is allowed to borrow, until February 7. Intriguingly, though, a temporary budget runs only to the middle of January.
Neither the Democrat President nor the Republican Representatives on either side of the divide can back down at this stage. For the president to make concessions would simply encourage the Republicans to demand more, and the demands and brinkmanship would go on for the next three years. The Republicans must stick to their guns or they will be admitting that the crisis was all their fault and that it was utterly pointless.
So nothing will be done before Christmas and everything will go into abeyance over the holiday period. I am, if anything, being optimistic to suggest that eyeball contact will resume as early as 6 January but even that date leaves time very short to find a long-term solution. The likelihood is that we will go over the brink again, with the US government starting to shut down again on 15 January and bargaining continuing for best part of a month as a default in US Treasury bonds looms once more.
Come See Me at the London Investor Show
I hope we will meet, in the flesh rather than metaphorically, on Friday next week when I resume my traditional role of first speaker at the London Investor Show. It really will be a pleasure because after three years of discussing how to invest in a recession we will be looking at prospects for recovery.
Please come up and have a word afterwards. I will be wandering round the conference and will call in at the Morningstar stand and also at that of Harriman House, the publisher of investment books including mine.
