5th February 2013
The fund manager says he expects some of Europe’s financial stocks to make a comeback and begin paying dividends again.
Bignell believes that the Eurozone will hold together with a break up not in anyone’s interests including Germany’s, which is currently benefiting from a weak currency and cheap funding costs.
He says that labour reform is progressing in Spain and Italy while even in France, where there has been little progress, the Gallois Report has recommended reducing labour costs.
“In Europe, labour reform is crucial. For years, Europe has traded at a discount to the US on account of its rigid labour laws. We think governments in Europe are taking advantage of the crisis to change labour laws and make them more flexible. Italy and Spain have made huge steps forward in terms of making their labour laws more flexible and market friendly,” he says.
The manager adds that things are getting certainly “less bad” if not quite good on the broader macro level, noting that government de-leveraging and fiscal drag in 2012 took about 1.5 per cent away from European GDP while this should be one per cent in 2013.
On a company level, in the financial sector, Bignell says the pace of de-leveraging is also slowing. Although a large number of banks are still shrinking balance sheets, some well known banks are close to meeting the capital requirements of Basel 3 including France’s BNP Paribas, Société Générale, Unicredit and some Swedish banks.
The manager outlines two specific reasons why the Invesco Perpetual European Opportunities Fund is now going overweight in Europe’s banks. He says: “Firstly, the pace of deleveraging is slowing in Europe. And secondly, for those better capitalised banks, we think that we should get positive dividend surprises as their strong free cash flow will not be eaten up by making new loans and therefore, in the absence of mergers & acquisitions and regulatory fines, we should see dividends rising. It is worth highlighting that only 30 per cent of the banking sector in Europe is currently paying a dividend, something we also expect to improve.”
Bignell invests on the basis of four key themes – secular growth stories i.e. firms that can grow organically above the rate of GDP, multi-national growth stories such as Nestlé and Unilever, both of which have over 50 per cent of sales in emerging markets, restructuring stories where firms are restructuring their cost base such as airlines Lufthansa and Air France and ‘bombed out cyclicals’ where the manager thinks the market has mis-rated the potential for a return to growth which includes automotive supplier Faurecia.