"We are often asked what the 'story' is for European equities. Our answer is that there is no compelling secular growth narrative for Europe. That is Europe's strongest point," says Barry Norris, managing partner of Argonaut Capital.
He believes there are clear signs the recession in Europe is over and that the recovery will be 'V-shaped'. "At the start of the year investors were asking: will there be a recovery? Now they are asking: what shape recovery?" he says.
Mr Norris believes the consensus view that the recovery will be anything but 'V-shaped' is beginning to look stale against mounting evidence that European economies are poised for a sharp recovery. "France and Germany are technically out of recession. And most major economies will grow in the second half of this year," he says. "Every time there's a big nasty recession you tend to get a big strong powerful recovery."
Once in a generation
Continental Europe currently offers the best buying opportunity in at least a generation, and is the best-placed equity market to benefit from a US-led recovery, says the manager of the Argonaut European Alpha fund, which has been top quartile since launch - his style being to focus on a core concentrated portfolio of European equities.
As Europe is now the cheapest equity market in the world on a price-to-book valuation basis, and European markets traditionally have higher beta than other developed markets, Mr Norris argues that now is a fantastic opportunity for investors to buy into European equities before a sustained recovery takes hold. "It's lonely to be bullish, but it's a winning position to be in," he says. "Hardly anyone is saying there's a 25 per cent upside to the end of the year. Most investors are running risk-averse portfolios and lots of people are not participating. That tells you about where we are in the market cycle."
Although markets have rallied hard from their March lows, he points out that we are still 50 per cent below 2007 levels. "Markets are only now at the same level as they were 10 years ago, and valuations have not been this cheap since the early 1980s or mid-1970s," he says. "While the past 10 years have been a 'lost decade' in terms of investment returns, Europe's companies have made very real progress increasing sales and profits over this period."
Ditch the europhobia
Mr Norris points out that many of these companies are global leaders in their sectors, which he says is another reason why UK investors, who have traditionally shied away from European equities, should cast aside their natural reticence to invest in the world's largest economy. "UK investors are often unenthusiastic about European equities but the fact is that the European Union is the world's largest economy, with Germany the world's largest exporter," he says. "Nestlè, the world's largest food company, is European, as is Nokia, the biggest mobile phone company, and Arcelor Mittal, the world's largest steel company. And they aren't the only market leaders in Europe.
"The sheer size and global importance of the European economy makes it an integral part of any long-term equity portfolio."
Mr Norris believes that size should not be the only factor driving investors towards Europe, however, pointing out that currency factors could soon have a beneficial impact on many European companies.
"A US-led recovery will lead to a stronger dollar and that will be a big positive for Europe's exporters, who have fought the headwind of a strengthening currency for a decade. Those particularly likely to benefit will be leading consumer goods companies such as BMW, Daimler, LVMH, Electrolux and Nokia. In addition, these powerful brands have competitive advantages which are not easily lost through lower-cost competition."
| Barry Norris CV |
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Barry Norris started managing money as head of European equities at Neptune, where he launched the Neptune European Opportunities Fund in November 2002 and managed it successfully until May 2005. He co-founded Argonaut, an investment boutique specialising in European equities in 2005. He is responsible for managing three European funds at Argonaut as well as two Dublin-based SICAVs. He graduated from Cambridge University in with an MA in History (1996) and MPhil in International Relations (1997) and trained as an investment analyst at Baillie Gifford. He also holds the CFA charter. |
Not the usual suspects
His investment strategy is "to look for industries that are bombed out and suffering from a cyclical downturn that has hit them hard" and "to look for share prices that are bombed out, too - when buying recovery stock you need something to recover from". As a result, Mr Norris likes the auto and paper industries, plus European financials. "Financials are terrible places to be when asset prices are going down and credit is not available. But if you acknowledge financials are geared to the downside you have to assume they are geared to the upside. I think they will do well to the end of the year," he says.
But he shies away from stocks where there is a long-term bull argument - for example, agriculture and commodities. "Too many stock market participants believe in the China story," he says. "But new bull markets rarely repeat themselves. We think China is going to disappoint. The Chinese banking system is pretty rotten. Nobody wants to build new factories. Lots of money is not going into the real economy - for example, via property and commodity speculation. Even China will run out of motorways to build.
"People have become lazy in their thinking about China. The ratio of the value of the stock market to GDP is higher than anywhere in the world. The economy is still only one-fifth the size of the UK and yet has hegemony over the global economy - that's blind leadership.
"A good story doesn't make good investing. Stories that have been going for six or seven years - for example, China, agriculture and commodities - are very stale. They don't tend to work forever.
"The power of narrative is something to beware. Essentially investing is about buying things when they are unloved and cheap and selling them when they are recognised by the market."
"At this stage in Europe you don't need a strong story to buy it. Therefore the theme is recovery - once-in-a-generation low valuations. I think that's a massively good story."
