Seeking Growth Opportunities in Europe

Sáenz de Cenzano: Alexander is the lead PM for the Fidelity European Growth Fund, which is our pretty big fund in the market, around €9 billion. At the moment, he has been running this fund since early 2007, so almost four year now with a good track record. We've assigned the Morningstar qualitative rating of Superior to this fund, so we think it will outperforms its peers in the long-term. Prior to this fund, Alexander was running the Fidelity Euro Blue Chip Fund also with a very good track record, so we are pleased to have him here today.

The first question Alexander would be your view on equities in general, especially on European equities given that it's your remit, why do you think they are undervalued? Do you think this is a good moment to get into this arena?

Scurlock: I continue to think that European equities look like an attractive investment. Off the last year's performance where the index was up 16%, fund was 20%. I still think there is a very good valuation argument in favor of European equities. If I look on a price earnings basis, they look cheap against history. If I adjust that to consider long-term cycle and where we are, they continued to look cheap and in particular, if I compare the yields which equities are generating against, for example, sovereign bonds in fixed income world, I think as an asset class, equities look cheap. Taking European equities against other equities around the globe, European equities continue to be among the cheapest. The challenge really is the next point, which is, where do you find growth opportunities?

Sáenz de Cenzano: Is there any, like, big theme in the portfolio that you're trying to capture at the moment, any kind of bigger story or idea that you think is especially interesting for your portfolio?

Scurlock: I think probably two things that I'd emphasize. The first if I look across the Eurozone, I mean if I think through the 90s and into the early part of AA decade, a lot of the growth of the Eurozone was based around the periphery, but really at the expense of the call and that growth was reinforced by trends from monitory policy, fiscal policy, the actual strength of the euro itself, but also labor, foreign direct investment and the euro transfers.

If I think now on a geographic basis, a lot of those trends have now reversed and I am finding probably most of the good ideas for investment are actually based around the core of the Eurozone. In particular, if I think about one trend that I am looking for in an environment where we have low interest rates, we have low inflation, but the threat of perhaps increasing commodity-based inflation, what I need to find is pricing power, and that's probably the universal theme which I am looking for across all of my equity investments which companies have pricing power and why, the ability one year against the last year to put up prices.

If I can give a few examples, within this space, if I think about the oil industry, oil prices are starting to rise, more money is being spent in terms of exploration and development of new fields but these fields are largely based around deepwater. Now, if I look at the exposure of that capital investment, I can actually play it through, for example, an Italian company like Saipem. Saipem provides a lot of the engineering requirement and equipment for deepwater investigation. So, as the oil price rises, this means that capital is being spent on their industry, they have pricing power one year to the next.

Another example would be in the luxury goods industry. If I take, for example, the British company Burberry, where I have been invested, for luxury goods companies unlike most industries, China tends to be very competitive, and have a price deflationary effect. Within luxury goods but also within autos China is actually the most profitable market, and the prices that they enjoy are actually the highest across the entire market. So, I continue to demand exposure within the luxury space and for example in Burberry in particular.

Sáenz de Cenzano: So, some of these folks you mentioned have some exposure to China and into emerging in general. What do you think about the emerging markets overall? I mean, some people are saying that it's a little overheated at the moment and that's going too far already; some others are still playing in that kind of exposure to emerging markets through European companies. Is that your view of what's the exposure in the portfolio to these emerging markets area?

Scurlock: I continue to maintain an exposure looking really for European names that are selling into the region. We talk about the emerging markets being overheated and the growth rate slowing, whether it's possible, while we're talking about a growth rate changing from perhaps 12% to maybe 10% or 8%. Now that level of economic growth is simply something I cannot find within Europe. Strong economic growth in Europe is a 3% GDP number.

So, even if we're talking about it overheating in parts of the emerging markets, the economic growth which is available is still at a faster rate. Of course, every year the economy grows, so the base gets bigger, so we're actually talking about a bigger quotient of growth. That again comes back to companies, I mean, I mentioned the luxury industry. China was trying to move its economy from being purely industrial and export based to a consumer based. As it does that, so actually the wealth distribution is greater, and you have vast population that are looking to acquire European goods and that's exactly what we've seen. For example, the autos industry; I met with BMW very recently. They are selling BMW's in China for €200,000, this is the highest price point that they enjoy anywhere in the world, it's extremely profitable business.

Sáenz de Cenzano: Great, Alexander. Thanks very much for joining us today. It's been very interesting. Thank you for giving your insights on European equities and in the markets in general.

Scurlock: Many thanks, pleasure to talk to you.

Sáenz de Cenzano: Thank you, all for watching.