Why you shouldn't ignore Europe
It is easy to find reasons for ignoring Europe at the moment – but investors that do so could be turning their backs on the possibility of making serious returns, according to Kevin Lilley of Royal London Asset Management.
The manager of the company's European Growth Trust acknowledges that the combination of low GDP growth being predicted for a number of the region's key economies, and the financial crisis gripping Greece, may act as deterrents.
But he insists there are still plenty of attractive stocks that are unaffected by domestic issues and suggests they are actually in the very early stages of a new business cycle that will help drive profits over the next few years.
"Investors may feel they want to run a mile after looking at the various economies but the market is still full of companies that can benefit from international growth," he explains. "Valuations also look pretty cheap for this stage in the cycle."
The aim of the £520.49 million fund, which was launched in March 1987, is to achieve capital growth by investing predominantly in quoted European equities. As a high conviction portfolio, it will generally contain a maximum of 50 stocks.
Before buying a stock, Lilley will have an idea of what it could be worth and then look for evidence of a catalyst to release this value. At the other end, when the potential upside is relatively low he will look to exit and move on to something else.
His view of the business cycle has led him to be overweight in both cyclical and financial sectors, but underweight in defensives – although he concedes this position adversely affected the portfolio's performance during the early part of this year.
He blames this on three major macroeconomic events that spooked the market: US banking reforms; China starting to rein back on some of the stimulus; and the sovereign status issue regarding Greece.
"In these situations people either sit on their hands or de-risk their portfolios," he explains. "This is why we saw a market sell-off in the areas perceived as being the most risky, such as financials and some of the cyclicals."
However, Lilley maintains that it would have been wrong to rotate into defensive names at that point because this would have only been a short-term measure that would need to be reversed shortly afterwards.
"My mid-to-long-term belief is the economic cycle continues to move forward and I want companies and sectors that will benefit," he explains. "In the meantime I am willing to forego some short-term performance."
He tips metals and mining; automotive; oil services; and early cycle industrials to do well, and predicts there will be some bounce back in financials with defensive names likely to get left behind in the market rally.
The total money value of all the finished goods and services produced in an economy in one year. It includes all consumer and government consumption, government spending and borrowing, investments and exports (minus imports) and is taken as a guide to a nation’s economic health and financial well being. However, some economists feel GDP is inaccurate because it fails to measure the changes in a nation's standard of living, unpaid labour, savings and inflationary price changes (such as housing booms and stockmarket increases).
An interchangeable term for shares (UK) or stocks (US). Holders of equity shares in a company are entitled to the earnings and assets of a company after all the prior charges and demands on the company’s capital (chiefly its debts and liabilities) have been settled. To have equity in any asset is to own a piece of it, so holders of shares in a company effectively own a piece proportionate to the number of shares they hold. (See also Shares).