23rd April 2015
Anthony Rayner, co-manager of Miton’s multi asset fund range asks whether there is still value to be found in Europe…
The over-arching theme in our portfolio for some time now has been our ‘new monetary regime’ theme, where central banks are in charge of markets.
One of our key macro views that sits beneath the ‘new monetary regime’ was to buy quantitative easing (QE) beneficiaries, for example, cheap, mid-cap Eurozone exporters, most likely to benefit from a weaker euro and positive earnings surprises.
Specifically, we screened for companies on low valuations, with a high proportion of their revenue from overseas and, importantly, where we were also seeing some positive price momentum. In early February we bought a basket of stocks that met our criteria. We prefer to construct baskets of stocks, as opposed to buying one or two individual stocks, as a basket reduces our stock-specific risk while giving us exposure to a theme.
Following the strong performance of eurozone equities this year, particularly in local currency, coupled with the start of the earnings season, it seemed an appropriate time to assess if there is still value in Europe.
The Europe ex-UK earnings revisions ratio recently returned to net positive for the first time in four years and the moving average is trending upwards. The rise in earnings revisions is likely to be driven by the rapid weakening of the currency and the lower oil price benefitting an export-denominated, net oil-importing economy. As the earnings season begins, we will get a better idea of the degree to which these factors have benefitted companies.
What about valuation? We rescreened our basket of mid-cap Eurozone equities and found that with the market and earnings rising aggressively in recent months, valuations have increased, but only marginally. They are still at sensible levels.
An important part of this thesis was that the euro was likely to weaken, although, like many, the pace at which it did caught us by surprise. As a general rule we aren’t comfortable having exposure to overseas currencies, and in this case we were even more cautious given our current view. Consequently, we have most of our euro exposure hedged back into sterling.
In conclusion, we still see value in Europe, and across our portfolios we retain a material position in mid-cap Eurozone equities. We have, however, taken some action to contain risk; the market has moved a long way in a short space of time and may mean revert, so we have trimmed all of our positions, taking profits and reducing our exposure.