Emma Wall: Hello and welcome to the Morningstar Series 'Why Should I Invest with You?' I'm Emma Wall and I'm joined today by Olly Russ, Manager of the Argonaut European Income fund.
Hi, Olly.
Olly Russ: Hi Emma.
Wall: So Europe, it's not exactly a new story. We've seen this recovery come through although it should be said it's about a year behind the U.K. which in turn is about a year behind the U.S. But there are still opportunities to be had from this economic recovery aren’t there. There are still profits to be made.
Russ: Definitely. I mean for the last few years. You've seen Europe go up, but actually what's happen to earnings is they've gone down. So it's been a re-rating story for last few years. Now this year is a first year we think we should get a proper earnings inflection point that means we are looking still perhaps at double-digit earnings growth for this year. That’s a big sea change, because you look at Europe compared to the U.S. it's under earning compared to where it should be.
So whereas the U.S. has gone to hit all-time market highs, that’s driven by all-time EPS highs, Europe is nowhere near, we're about 30% below peak earnings. So got a long way to catch up in Europe. But I think the sustained market rallies, and these valuations we do need to see earnings come through this year, and presumably for the next couple of years as well.
Wall: And of course you are an income investor. So how is the market supporting the shareholder in terms of, are they being rewarded yet, is income starting to come through post-recovery?
Russ: I think this year actually there has been a bit of discrimination coming back into the market, for last few years perhaps bit more of a beta rally. As people just powered into perhaps the highest beta names, the ones that are more likely to go up.
This year we are seeing a bit more discrimination people are paying a bit more attention to valuations than they have done for the past few years. So, I think the next few years might be slightly better for income type strategies as people do pay a bit more attention to where is the value in these markets, if they are not just going to go up relentlessly which we now seem to have come, rather to the end of that story.
Wall: Of course Europe is getting it's house in order, but Europe is not an island. It is affected by what's going in the wider world in particular China. You have countries like Germany who really see the economic brunt of what's going on in China. Is that a concern for you?
Russ: It's always concern, but I think for our portfolio on the income side of things really we don’t have that much that is exposed to China. The sort of things that are income stocks tend to be financials, telcos, utilities that type of thing. They tend to be more domestically focused. So really we are playing the domestic Europe recovery at this stage. So bit less concerned about what's going on in China, maybe then some. But obviously it does have global impact.
You will see presumably some sort of wave of deflation coming across from China now, that could impact obviously interest rates in Europe and the rest of the world and certainly you look at the DAX as now in a bear market has dropped more than 20% from top. So that has really been quite severely impacted, but they are probably the most exposed.
Wall: I suppose that’s a buying opportunity for you too. When you see markets dip like that?
Russ: I think a lot of people are looking at this as a bit of a buying opportunity. But again discrimination, buy things with reasonable valuations, because there is lot out there, particularly anything with growth, anything with secular growth now trades between 20 and 30 times earnings, some times more.
I think people need to be cautious markets have been propped up of course by QE. So perhaps we now need to look for valuation support, just for that extra bit of security.
Wall: Olly, thank you very much.
Russ: Thank you.
Wall: This is Emma Wall for Morningstar. Thank you for watching.
