Europe 'still has much going for it'

As the market braces itself for volatility ahead of the British vote on whether to stay in the EU, Mr Wilcox says that a lot of it is "political noise" and investors should keep an eye on the "fundamentals" of companies, as well as numbers that show
As the market braces itself for volatility ahead of the British vote on whether to stay in the EU, Mr Wilcox says that a lot of it is "political noise" and investors should keep an eye on the "fundamentals" of companies, as well as numbers that show Europe is in recovery.ST PHOTO: MARCUS TAN

In our monthly series featuring leading financial experts and fund managers, Nicholas Wilcox, European equity group executive director at JP Morgan Asset Management, looks at European equities and how they could be affected by a possible British exit from the EU.

Britain will vote on whether to stay in the European Union (EU) in about two weeks and the market is bracing itself for volatility. But Mr Nicholas Wilcox, European equity group executive director at JP Morgan Asset Management, told The Sunday Times that a lot of it is "political noise" which European companies and consumers are used to.

Instead, investors should keep an eye on the "fundamentals" of companies, as well as numbers that show Europe is in recovery, he said.

The asset manager, who has been with JP Morgan for seven years, moved with his family to Hong Kong last September because "European equities have become very popular".

The European equity group was managing US$42 billion (S$57 billion) worth of assets as of the end of March this year.

Mr Wilcox was in Singapore to speak to clients about the JP Morgan Europe Dynamic Fund, which became available to retail investors here in November 2013.

The fund, which was launched in 2000, has four currency share classes available, with a $1,000 minimum initial investment amount.

In the euro share class, the fund has a three-year annualised return of 7.5 per cent, after charges have been applied. The fund aims to maximise long-term capital growth by investing primarily in an aggressively managed portfolio of European companies.

While European equities suffered from the same downturn as the global stock market at the beginning of this year, Mr Wilcox believes Europe still has much going for it. "Europe is up 150 per cent since March 2009. Think about events that have happened since that time. We've seen bailouts, bail-ins, political change in terms of parties in charge of various countries, and European companies have managed to deliver."

Emphasising that investment is about expectations, he added that in comparison to other regions, Europe has more room to beat expectations. "In the US, companies are at peak profit margins, unemployment is at an all-time low, so room for marginal improvement is small. If you look at Europe, from a marginal perspective, it's 20 per cent, 30 per cent below its peak, unemployment is falling but it's still relatively high, so it is able to beat expectations and has a lot more headroom to continue to do so."

Q A possible British exit of the EU could trigger market volatility and result in a lengthy negotiation period. How would you advise investors to proceed in these circumstances?

A The outcome of Brexit is very uncertain. It's not just uncertain as to whether Britain will stay in or leave, but also what happens if it does decide to leave. That said, a lot of that uncertainty is priced into markets today, whether in equities or currencies.

However, a lot of British companies are doing very well despite the uncertainty. There will be companies that are unaffected by Brexit, and some will benefit from it. Investors should approach very much from the bottom up, stock by stock. The days of buying passive funds to gain access to Britain and Europe are behind us - you need to be very selective in the stocks you pick.

Q Why is it a good time to look at European equities now?

A While there will be increased volatility as we move nearer to the referendum, what is for certain is that volatility isn't always negative. Volatility creates opportunities, and some of those companies are coming to us quite cheaply. But if Britain votes to stay, you will see rapid snapback in markets after that.

We are investing in expectations essentially... and right now, every time you see data coming out of Europe, whether it's mining, retail sales or unemployment data, it's more often than not ahead of our expectations. That, for us, is what is really exciting about European companies at the moment.

Q What companies do you like?

A Insurance companies have been very successful over the last few years. They have had to upgrade the quality of their underwriting business, so a lot of insurance companies are of far higher quality than they were in the past.

One of the things that I think is lost in discussion is that Britain is undergoing a huge recovery, one of the strongest recoveries in Europe in terms, particularly, of consumption. Car sales hit a decade high in March, while retail sales have stayed healthy. People are consuming and we are playing into that with retail names. Opportunities are diverse and a lot of these names are not affected by Brexit.

Similarly, house builders have been a big part of our portfolio for many years now. A lot of those names were sold off quite dramatically this year as people have been concerned about external buyers leaving the British market. That is overdone because if you think about these builders, they are selling houses in the north of England to families trying to get onto the property ladder. It doesn't matter where Britain is in Europe for that transaction to take place.

Q Companies may behave rationally, but why would British consumers be confident about spending now?

A Europe has always had a lot of political noise, for the fact that it has 28 different components to it. European consumers, and in particular European firms, are very used to dealing with uncertainty. You'll find that European consumers and corporations are more resilient to uncertainty than their global counterparts. There's uncertainty at the moment, but it's a far better situation than we were in three or four years ago. Incrementally, it's an improving trajectory rather than a deteriorating one.

Q How much more can European earnings grow?

A In Europe, about 80 per cent of companies' financing comes from bank lending. One of the reasons European earnings have been so suppressed in the last four, five years is that bank lending essentially stopped.

While banks had been nervous about lending because of the rigorous checks of the asset quality review, the review came to an end at the end of 2014 and banks were more encouraged to lend. Coupled with European Central Bank (ECB) policies whereby banks can borrow very cheaply as long as they passed it on to firms, it has meant that credit supply has picked up dramatically.

So for all the political uncertainty, the ECB has been very clever in saying it will do its best to stimulate credit, and that is what's going to drive company earnings forward for the next few years.

A version of this article appeared in the print edition of The Sunday Times on June 12, 2016, with the headline 'Europe 'still has much going for it''. Print Edition | Subscribe