Morningstar's "Perspectives" series features investment insights from selected third-party contributors. Here, multi-asset manager Talib Sheikh of JPM Multi-Asset Income Fund and multi-manager Tony Lanning of Fusion Funds explain why they are both materially adding to their European allocations, but for different reasons and through different investments.
Tony Lanning, manager of the JP Morgan Fusion fund range
My expectations for Europe GDP growth are higher than market consensus – leading indicators suggest we could get 2% GDP growth. I expect equities will benefit from low inflation, real wage growth, falling oil prices and ECB QE. As a result, earnings expectations should surprise to the upside for the first time in seven years.
Some major global asset allocators were starting to get more involved in Europe at the beginning of 2014, when they saw value in the region, but that trend slowed in September, resulting in outflows. Subsequently interest has picked back up, but in my view the region is still broadly under owned. Macro and political risks such as the Greek debt negotiations were holding investors back, but a partial resolution on Greece and the tailwinds from the ECB’s supportive monetary policy should help Europe surprise to the upside.
Europe is also still attractively valued, and I have materially added to his holdings recently. I have bought TT International Europe, a lesser known fund with cyclical positioning that is overweight financials and capital goods companies poised to benefit from the uptick in European growth. I have also bought Wellington European Strategic Growth, which should be a beneficiary of the European Central Bank’s quantitative easing, as it targets companies with a high return on equity and high quality growth trading on a premium to the market.
Talib Talib Sheikh, manager of the JPM Multi-Asset Income fund
Playing Europe with a slightly different theme, I have been adding to European dividend paying shares, looking to take advantage of the emerging recovery and the boost to the region from the ECB and falling currency.
With the ECB having launched its long-awaited salvo against economic stagnation in the eurozone, this has reinforced the team’s conviction in risk assets and particularly in European equities.
Previously I had been overweight on the basis that these shares provide an attractive source of dividend income, more so than for their prospects of delivering significant capital growth.
Now with the quantitative easing package signalling that interest rates are going to stay at record low levels of the foreseeable future and in real terms are likely to go even lower, the ability to consistently generate approximately 4% dividend yield from a diversified basket of European equities looks that much better on a relative basis.
On a comparative basis European equity valuations remain cheap. I expect the euro to maintain its downward trajectory, which should benefit European exporters and in turn strengthen company earnings, helping to bolster market gains.
Shares are the best place in the capital structure to buy yield in Europe in my view; consider the negative yields on some European government bonds compared with the 2.5% or 3% yield that investors could get from buying high quality European corporates with solid balance sheets, strong brands and significant pricing power.
I previously held 3% of the global multi-asset income fund in a dedicated European equities sleeve at the start of 2014 to now having an 8% allocation in the portfolio.
The ability to capture average dividend yield of approximately 4.5% on European shares looks compelling relative to the low average yields on offer from traditional fixed income. I look for a diversified mix of shares that can offer sustainable income, rather than simply picking those with the appearance of the highest yield, such as include Vodafone (VOD) and Daimler (DAI).
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