Emma Wall: Hello, and welcome to the Morningstar series 'Why Should I Invest with you?' I'm Emma Wall and here with me today is SWMC European Fund Manager, Stuart Mitchell.
Hello Stuart.
Stuart Mitchell: Good morning.
Wall: So, Europe, quite a lot has been happening recently; the ECB announced that it was finally going to do QE and then we've had the Greek elections. I mean a lot of turmoil. How does this affect how you run a European fund?
Mitchell: I mean, I guess, we perhaps have been more relaxed than many other managers. I mean, our view is, what's happened in the last week or so is really part of a much longer process which began in 2007. It's all part of that move towards a normalization of the Eurozone. So, looking at Syriza, victory of Syriza, first of all, again, at some stage it was inevitable that Greek debt would have to be restructured.
I mean, 180% of GDP is clearly unsustainable, but politically there had to be a moment of time that it would be possible – that kind of restructuring would be acceptable to the French and German and Italian electorates and we're probably getting nearer and nearer to that spot now. I mean, our guess is that Syriza demand would somehow be met and there will be a face-saving type of solution which will be palatable to the German and French electorates.
I guess all the discussion around QE, I mean, our view is, it's very debatable what kind of impact that will have on the real economy. But again, it could just give that crucial extra boost. It could excite foreign investors come to start to consider seriously investing in Europe. But again, it's all part, in our view, of this slow gradual move towards normalization within the Eurozone.
In fact, as far as we could tell, the economy had really been started to recover as early as in the summer of last year irrespective of quantitative easing and the TLTRO and other kind of measures. So, we have a reason to be optimistic outlook. It appears to us the economy is continuing to recover as we thought and with the latest developments we're getting that little bit further towards a final normalization of the crisis in the Eurozone.
Wall: With situations like these there is so much is driven by sentiment. I think one of the things that QE does lend is that finally Draghi coming through and doing what it takes.
Mitchell: Yes.
Wall: Looking at the best and worst case scenarios, markets go up, obviously, is the positive. Is there still a risk of Grexit? I mean, should we be considering the worst case scenario as investors in the region?
Mitchell: Incredibly good question. I mean, our view is, it's incredibly unlikely, highly unlikely and I think the German people would find it just the end to be seen as the ones who caused the utter destruction of the Greek economy. And again, I think we always judge Europe from a very Anglo-Saxon perspective.
But in fact, if you're meeting with politicians and I guess the people who are discussing sort of ideas at the center of Europe then they are much pro-European, they are much more – the idea of a group of nations coming together closely is a much more developed theme than perhaps it is over here. So, we think it's terribly unlikely. It's just how you find the face-saving deal and whether Merkel’s judgment to the general electorate is ready yet for it to be told that they are going to – they will be bailing out the Greek economy.
Wall: Looking then at the companies listed in the Europe region, should we be looking more at domestically focused stocks because those domestic economies are being boosted or should we still be relying on international revenues because they are outside of the problem?
Mitchell: That's another great question and one we kind of constantly battle with. I mean, our view at the end of the day is that the opportunity is probably with the more domestically-orientated companies. If you look at rough valuations and a typical domestic European company, whether it's a homebuilder or a large utility, would trade at roughly half the valuation of their equivalent in America and a typical domestic company relative to a typical international company in Europe, again, the discount is as wide as it never has been.
Of course, that reflects a period of very strong growth in China and the emerging world in the past few years and the slowdown we've had in Europe. We think there is a reasonable chance that could all revert to mean because we have Europe beginning to recover now and we didn't talk about the effect of the oil price and the weakness of the euro, but these are dramatic.
This will boost the economies by one or two percentage points before we're even started. So, we think at the same time some disappointment on demand from China and the emerging world. So, we think there is a good chance that valuation gap will narrow. So, our focus has been very much on the big domestically-facing companies.
Wall: Stuart, thank you very much.
Mitchell: Not at all. Thank you.
Wall: This is Emma Wall for Morningstar. Thank you for watching.
