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 Cedric de Fonclare, Manager of the Jupiter European Special Situations Fund.
Hi, Cedric.
Cedric de Fonclare: Hello.
Wall: So, actually, there hasn't been that much negative news about the European economy in recent headlines, which is great because for a while it did dominate the headlines.
Fonclare: That's correct. For a number of years obviously it's been the main problem in the world and actually from a low base indicators have been improving quite significantly in the recent years. So, unemployment from a high base is coming down. Credit growth is coming back and some of the leading indicators are quite positive.
Wall: So, is it fair to say then the worst is behind us in terms of European economic downturn?
Fonclare: Well, I hope so. I mean, it's still a fragile recovery and the main issue with Europe this time is very much what's happening in the rest of the world. Now, if you look at emerging markets, it's well visible that the economies are moving from what were industrial-driven economies towards much more consumer-related economy.
And that obviously will take time to reflect and that will impact some industries. When it comes to North America, obviously concerns about the oil and gas industry and the strength of the dollar for the exporters and that's squeezing some of their profits. But one has to remember that about 70% of U.S. GDP is driven by internal consumptions and here the news is quite good. The oil price is going down and wages are going up. So, actually, U.S. is not doing too bad.
Wall: I suppose as a European equity investor people might be saying why do you worry about the rest of the world? But as with the FTSE in fact a lot of revenues for Europe come from outside of Europe, don't they?
Fonclare: Correct. I mean, Germany is a prime example of that and is obviously exporting a lot to Asia and particularly China and some businesses are suffering from that today. The Nordics are very much exposed to rest of the world. So, either because some of these core economies in Europe have been facing a very low growth environment for years, and they had to go beyond their borders to access additional growth, or because the size of the market is so small; Sweden, Switzerland, and you had very powerful and international businesses which again try to expand their market opportunity by going abroad.
Wall: Looking then at those specific businesses, I know you've talked recently about the Gulf that's emerging between the sort of businesses that are doing well in Europe and those that are struggling and it seems that those are doing well are continuing to do well and those that are struggling there are too many barriers to entry there?
Fonclare: Well, if we start with the bad news, I mean, clearly the ones who are underperforming at the moment and you have seen this is quite correlated to emerging markets. So, commodity-driven industries, even if there are some exceptions, are obviously suffering today. Another sector, an important sector in Europe is obviously financials and here there is a mistrust from investors in the strength of their balance sheet and sort of the squeeze they have got in operating margin, et cetera. So, that's another area where there is not much support in terms of valuation.
On the other hand, you are right to highlight that there are some very successful businesses. But really the point for me as a stock picker is to make sure that I don't have overpay for that quality. So, growth at reasonable price is very much what characterise my style.
Wall: Especially as you do have special situations in that title you are looking perhaps for things that, as you say, are not at the expensive end, the things that maybe are mispriced and are looking unattractive?
Fonclare: Yes, I think, if you just take the example of the automotive industry, this is a very cyclical industry. People have been worried about number of cars being sold in China and Europe and the rest of the world. But then if you look at the sub-sector, which has to do with the auto component manufacturers. They are selling the technology, the CO2 reduction, the communication and the electronic parts in the car, which is growing as an overall value of the content of the car year-after-year.
And the likes of value and content of that independently more or less of how many cars are sold in the world are able to maintain quite a nice level of growth and actually they are priced for no growth at the moment which is quite the attraction.
Wall: Cedric, thank you very much.
Fonclare: My pleasure.
Wall: This is Emma Wall for Morningstar. Thank you for watching.
