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 Sam Morse, Manager of Fidelity European Values.
Hello, Sam.
Sam Morse: Hi.
Wall: So, we were talking before the cameras rolled about interest rates and I thought a very interesting point that you made is that European bonds may not be rising anytime soon, that is, interest rates. But that doesn't mean that European equities are not affected by the general rise in interest rates from across the pond, because this is a very global market, isn't it?
Morse: Absolutely. Yeah. I mean, investing in European companies and European companies these days are as global as U.K. companies or American companies. I mean, less than 50% of the earnings of European companies now comes from Europe itself. And global markets are very synchronised. So, we tend to find that what happens in the U.S. has a major impact on our markets here.
Wall: And that is because on the whole asset prices have been propped up by fantastic amounts of QE and low interest rates. And with that being taken away, that then creates concerns about what it means for those asset classes that have been propped up?
Morse: Yeah. I mean, I think, in 2017, we saw very strong markets. And I think that was largely driven by a big improvement, certainly, in Europe in terms of earnings growth and dividend growth. So, the fundamentals have been strong. And I think there are some questions – this year has obviously got off to a slightly more difficult start. We've seen a lot more volatility in the market. And there are some questions from an earnings point of view whether this is as good as it gets for corporates in general.
It's interesting. We do a survey every year where our analysts ask the corporates they invest in, how do they see the outlook in terms of earnings growth, in terms of capital spending, et cetera. And this year's survey was extremely positive, so positive that actually it was titled "as good as it gets?" And I think as seasoned investors we are always a little bit wary when corporates are confident, when there's a lot of M&A around, et cetera that maybe it is as good as it gets and that the next chapter will not be as exciting.
Wall: Having said that, a lot of investing at the moment is to do with relative valuations; you know, how do things look, expensive or cheap, compared to others.
Morse: Yes.
Wall: And Europe does still look, on that basis, quite a compelling investment?
Morse: Yes. It does. And I think it's fair to say that with the recent pullback, you know, the P/E, the aggregate P/E of the market is now more in line with its historic averages, perhaps, if you include the TMT boom. But I think, one concern on that front is that two things that have, as you mentioned before, supported the market greatly over the last decade or so is the fact that alternative investments, bond yields, for instance, have been extremely low and also, obviously, there has been immense liquidity as a result of the quantitative easing programs around the world. And I guess, one of the main concerns for investors that's perhaps led to this volatility year-to-date is that those two crutches, so to speak, are slowly being removed.
Wall: Now, as an equity investor, you don't perhaps have the tools at your disposal that a multi-asset investor who is feeling cautious might do, which is to move everything into gold and cash. So, what do you do as an equity investor when to proceed with caution?
Morse: Yes. Well, we always advice our clients not to try to time the market. And I personally when running my funds do not try to time the market. So, I will stay fully invested in both the funds. But it does have an impact on my stock selection.
And really, what I mean by that is that I think now at this stage in this cycle it's prudent to assume that – I invest on a three to five-year horizon – I think it's prudent to assume that on a three to five-year horizon we will have both an economic downturn and probably a stock market downturn as well.
So, when selecting companies, it's very important, I think, to put that in your modeling in terms of deciding whether this is a good company to hold over the next three to five years or not. And maybe some of those companies that look very cheap right now, perhaps in the auto space or the banks, may not prove as cheap if we have a cycle like that, whereas companies that perhaps on the surface look at bit more expensive, some of the consumer staples or healthcare companies, might actually look a lot cheaper if you build that sort of a downturn into the next three to five years.
Wall: Sam, thank you very much.
Morse: It's my pleasure.
Wall: This is Emma Wall for Morningstar. Thank you for watching.
