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 Liontrust's Olly Russ to talk about European equities.
Hello, Olly.
Olly Russ: Hi there.
Wall: So, you said to me just now that you think the world, specifically in Europe, is in a better place than it has been for quite some time. What did you mean by that?
Russ: Well, of course, everyone knows that by the great financial crash or crisis of almost 10 years ago now, the U.S. and Europe were caught up in that, but perhaps forgotten is just how well correlated before that U.S. and Europe were. Since that time, of course, the U.S. has gone onto all-times earnings highs, but Europe hasn't, because as soon as we came out of the great financial crash, we went straight into the Eurozone crisis which was linked but not quite the same.
It's only really over the last year or so that we finally emerged from that Eurozone crisis with really the Italian banking crisis that never quite happened. That was really probably the last aftershock for Europe of the crash and now we are beginning to get out on the other side.
Wall: And what about fundamentals? Because for a while not only was the economic picture looking a bit clouded for Europe, but earnings were lagging as well. But that has started to change, hasn't it?
Russ: Last year was the fundamental change in trend for European earnings. So, before that, for the previous six years really analysts always expected double-digit earnings growth. But by the time we got to the end of year, we had nothing or less than nothing. So, really, even now, European earnings are quite a long way below their prior peak that we saw in 2008. But last year, there was a fundamental change in trend. We got almost double-digit earnings growth out of Europe, which is almost unheard of now, and it looks like we might do almost the same again this year.
Wall: Not to dwell too much on the macro and the negative, but we are very obsessed here in London about Brexit and what the implications are going to be for the U.K. But of course, Europe does incredible amount of trade with the U.K. It's not just the U.K. that's at risk from the Brexit fallout. As European equities manager are you concerned by, if we have our worst-case scenario, how that impacts European companies?
Russ: In aggregate, there's quite a bit of trade obviously between the U.K. and Europe. But it's not that significant for most European countries apart from maybe Ireland. So, I don't think it's going to have too much of an impact. And I think the company's belief at the moment is those things will carry on pretty much as they are now realistically.
Wall: So, economies looking better, Brexit is not a concern, earnings are rising. What else is there to be positive? Are there particular pockets where you are seeing great opportunities?
Russ: At the moment, in terms of valuations in the market, I think there's been over last really decade, a very strong run for growth over value which we've seen across markets. And the question will be when does that start to reverse, when does value come back into favor. And it's a big question for us, of course, on the European income side because we do have a value tilt very much so. Financials, big part of value in Europe as well and a bit part of our fund. So, they are looking particularly cheap at the moment, bit unregarded perhaps not quite so glamourous as some of the tech stocks that we see in the States but actually phenomenally good value.
Wall: Quite sensitive though financials to interest rate movements, not just in Europe but of course over in the U.S. as well, because companies are global. How much does that sort of play into your analysis?
Russ: They are very well correlated actually with the direction of the U.S. interest rates, 10-year in particular plus more so even than the European equivalent. They are very sensitive to what's going on in U.S. rates. We think the direction of U.S. rates from here obviously is starting to drift higher now. I think people have got around the idea. Now we are sort of 3% and just briefly above 3% on the U.S. 10-year.
People can see the direction of travel. So, that's clear on America. Isn't so clear in Europe. Really rates haven't gone up much at all if anything this year. But by the autumn of course the ECB will wind down its QE program, it's one of the last still going. The Americans are doing quantitative tightening effectively already. So, we don't know what impact that's going to have in Europe, but probably, volatility will go up, but also, I think, yields will go up, government yields, bond yields generally.
Wall: Olly, thank you very much.
Russ: Pleasure. Thank you.
Wall: This is Emma for Morningstar. Thank you for watching.
