our view that the domestic European economy is recovering faster than expected. We expect the recovery in domestic demand to continue to accelerate and for results to continue to beat consensus analyst forecasts in 2016.
“As the Eurozone moves closer to normalisation investors have struggled to accept how deeply companies and governments have restructured in the periphery and how a significant proportion of peripheral Europe’s productivity gap with Germany has now been eliminated.
“We continue to find the best opportunities in the more domestically orientated areas of the market. Banks, for example, is an area we believe the market has failed to appreciate the benefits of a rapid recovery in financial margins coupled with draconian cost cutting and easing regulatory pressures. We have focused on the strongest retail banking franchises such as Lloyds and Intesa where we believe returns will continue to rapidly return to pre-crisis levels during 2016.
“Europe remains compellingly valued with shares pricing in an unusually bearish decline in returns on capital into perpetuity. More strikingly, domestically orientated companies are trading at, in many cases, a 50% discount to their counterparts in the US. We believe investors will increasingly recognise the strength and sustainability of economic recovery helping European equities to trend higher in 2016 and to perform well on a relative basis. The potential for additional ECB stimulus would lend further support to the asset class.”
US equities remains, in our view, constructive but requires increasing selectivity.
“The corporate environment continues to be supported by solid cash flow generation and strong balance sheets, in addition to sustained profit margins and attractive returns on capital. In our view, these results are a reflection of the ingenuity of corporate leaders to push for advances in science while harnessing highly innovative technology applications to improve global business performance.
“Importantly, equity valuations are not overly demanding. Moreover, with the recent downdraft in equity prices, the valuation fulcrum has shifted – albeit slightly – resulting in an increased margin of safety versus the start of 2015. Specifically, equity valuations in the US already appear valued for very slow growth, tilting closer to the stagnation view of the world rather than a view for long-term normalisation. Thus, any sense that the global economy is not heading toward either a recession or secular stagnation could be very well received by investors in risk assets.”
“We continue to believe that the most powerful equity narrative is the recovery of domestic Europe.” – BARRY NORRIS
Barry Norris Manager of the FP Argonaut Absolute Return Fund “We continue to believe that the most powerful equity narrative is the recovery of domestic Europe and, in addition, continue to find attractive idiosyncratic earnings surprise in single stocks. Somewhat ironically, given long-term scepticism of European equities, the biggest risks are now all exogenous: the Chinese economy, Fed funds and commodities.
Charles Kantor Portfolio manager of the Neuberger Berman US Long Short Equity Fund: “With modest but still positive earnings growth forecasted for the S&P 500 in 2016, the outlook for
“However, contagion threats should be limited by the delay of or even addition to monetary stimulus in Europe. As such, although volatility may remain elevated for a period of time, we remain confident in our fundamental positioning and see compelling opportunities on both sides of our book.” THFJ
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