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 Mark Nichols, Manager of the Threadneedle European Select Fund.
Hi, Mark.
Mark Nichols: Hi, Emma.
Wall: So, looking at Europe over the next 12 months, there are quite a few big events in the calendar. And normally, economics and politics is quite separate from stock markets, but we have learned the hard way over the last six months with Brexit that there can be an impact on markets when there is a major surprising political event. So what does what we've learned mean for the elections coming up in Germany, France and Italy?
Nichols: Yeah. Well, it's a big question. I think it's the key thing that everyone is thinking about right now. As you know, our approach at Threadneedle is very much bottom-up. We do look at companies first and microeconomics tends to sit before macro. But the lesson of Brexit was, be aware that these events can create material opportunities.
We had some serious share price moves on the day of the results coming through the Brexit vote and we know for sure that the Italian referendum is coming up in November. It is causing a great deal of confusion amongst the Italian electorate.
People don't actually seem to know what they are voting for. It's turning into a bit of a referendum on Renzi himself and there could be a real prospect that some really great Italian businesses get sold down, get mispriced dramatically on the day.
And our approach really is to try and have some cash there, have some firepower on the sidelines and be ready to step in with the stocks that we really like fundamentally on a bottom-up basis, things like Campari, not a particularly Italian business selling Aperol and Campari around the world. The U.S. is their biggest market. If that were to get caught up in a negative move in the Italian market, something we'd like to step in and take advantage of.
Wall: So, is it then about finding those domestically-listed stocks with international revenues because certainly in the case of Brexit and the FTSE 100, the companies which have profited, which have rallied considerably are those with revenues from outside of the U.K.?
Nichols: Yeah. I think the big issue is, financials, banks are very domestic businesses. There is not really an easy way for them to escape change in their domestic market. The key for us typically is, is finding businesses that can take their model outside of their national borders and be a success with that. So, quite often branded goods do very well when they are taken abroad, taken into emerging markets, for example. And so, it's those kind of businesses we'd be focused on.
If they get caught up and there is simply some sort of programmatic selling in the market, those are the kind of businesses we'd be looking to buy not necessarily domestic financials where there could be a material negative impact.
Wall: And as well as a backdrop of sort of political change, Europe has a backdrop of central bank stimulus at the moment and that is going to continue for some time. How does that influence you as a stock picker, if at all?
Nichols: It does have some impact. I mean, clearly, we know that growth rates are not as attractive as they were in the past and our view would be very much we're in an environment of lower for longer. And therefore, we have to think about what we're prepared to pay for what kind of growth rate and clearly, that has to be in the context of the current market environment and the current growth rates that are available out there.
So, in that regard, we would be of a mind that 4% organic growth at the top-line today is very attractive. If we'd been talking back in the early part of the last decade, that would have sounded pretty anemic. So there has been a slight shift in perspective.
Wall: And I think that's true, although you're obviously a European equity investor, of markets globally, isn't it? the sort of stimulus that we've seen enter the global markets has meant that we've had to make an adjustment in what we're prepared to pay and the return that we'd like to get for that money.
Nichols: Yeah. I think that's absolutely right. And one of the key questions we have is, is how do people afford to retire given this? They are not earning as an attractive a return on their investments as they would have done in the past. And our view would be that – again, you have to go back to good businesses that have the ability to generate growth by investing inwardly in what they do, what they are good at, whether that's brand building or getting closer to their customers, offering more attractive services to them. And therefore, that becomes an even more pertinent thing for us to focus on.
Wall: Mark, thank you very much.
Nichols: Thank you.
Wall: This is Emma Wall for Morningstar. Thank you for watching.
