Don't Dismiss Europe
08/06/2009 9:18 am EST
Stephen Peak, head of Pan-European Equities for Henderson Global Investors, says the continent is still producing plenty of winners.
Q. Henderson European Focus is one of the best-performing international funds in the Morningstar universe, both this year and over the last five. What accounts for that? [HFEAX is up 74.9% year-to-date, and 11.9%, annualized, over the last five years. It’s beaten its Morningstar category benchmark by 21 percentage points this year and six percentage points, annualized, over the last five, placing it in the top 6% of funds in category over those periods—Editor.]
A. The fund employs a bottom-up, multi-cap blend approach. We can look for opportunities in both growth and value stocks and also across the market-cap spectrum. This enables us to take advantage of inefficiencies [among small caps], where analyst coverage is sparse, but also in larger companies when opportunities arise.
We chose not to capitulate on [commodity] stocks last year at what we felt were oversold levels, and have been rewarded by strong recoveries. [As for] new holdings, UK bank Barclays (NYSE: BCS; LSE: BARC.L) has performed very well, as has Danish brewer Carlsberg (LSE: 0AI4.L). [Barclays] has bulked up its investment bank through the Lehman Brothers purchase and aggressive hiring and looks set to emerge from the crisis as a long-term winner. We bought Carlsberg at the beginning of the year—it was trading at about seven times earnings on concerns over the impact of Russian macro/currency issues on profits. We felt these concerns were overdone. The shares have rallied strongly, thanks largely to the strength of its Russian business—this is a massive growth market where beer is almost considered a soft drink!
Q. Europe is often seen in the US as a slow-growing region dominated by lumbering “national champions.” So, where are all these great mid-cap growers coming from? And will they be stymied by heavy-handed regulation?
A. Europe is dogged by relatively low GDP growth and socialist governments limiting restructuring. However, the underlying business exposures of these companies can be very different. For example, Kingdom Hotels (LSE: KHI.L) is a UK-listed hotel developer and operator with hotels primarily in emerging markets—a beneficiary of the growing middle class and increasing business travel in developing economies. [Miners] are clearly major beneficiaries of growth in China. Europe also offers a number of “best in class” companies which should perform well, regardless of European growth, and we believe a bottom-up approach is key to identifying them.
Q. The fund seems to have favored energy producers and industrials this spring. Does this reflect a macro call for a global upturn?
A. We have been overweight miners and energy companies, but marginally underweight industrials. In energy, our positions are focused on exploration companies, which we feel offer better opportunities than the majors.
We have reduced our mining exposure of late, as the sector has had a strong run, but we have added ArcelorMittal (NYSE: MT), the steelmaker, as it remains attractively valued and offers excellent up side due to its exposure to a pick-up in spot steel prices and volumes. Elsewhere, we have added other selective cyclical exposure through car and truck maker Daimler (XETRA: DAI.DE) and chemical company Henkel (XETRA: HEN.DE).
Q. Can you discuss some of your top recent holdings such as Centamin Egypt (LSE: CEY.L) and Temenos (Zurich: TEMN.SW)?
A. We’ve owned Centamin since early 2003, and it has performed very well for us (rising from nine pence to 90 pence now), [although it’s been] a rocky ride at times. Centamin controls the Sukari mine, the first modern gold mine to be built in Egypt and one of the largest gold reserves not controlled by a major. The resource has been upgraded several times this year, and the stock has also just started to be covered by BofA/Merrill Lynch, the first bulge-bracket investment bank [to follow it]. It also has been the subject of takeover speculation. We see further up side as the company transitions from explorer to producer and attracts more conservative investors.
Temenos is a Swiss banking software company. Despite being relatively small, Temenos is the market leader in core banking software—ahead of much larger rivals SAP (NYSE: SAP) and Oracle (Nasdaq: ORCL). The outlook for its clients has improved significantly since the turn of the year, and Temenos has a high “win” rate for big deals.
Q. Which sectors in European markets look most promising? Why?
A. The recent rally has led to some very attractive valuations in defensive areas as investors have rotated into more cyclical areas to chase the rally. We have recently [invested] in Imperial Tobacco (LSE: 23KC.L), which offers strong growth prospects in both developed and emerging markets and manageable borrowings following the Altadis acquisition. We have also bought Sanofi-Aventis (NYSE: SNY; Paris: SAN.PA), the French pharmaceutical company which has strong growth prospects [and] a fraction of the generic exposure of its peers, yet [is] trading at a discount.
Q. Europe has trailed Asia, Latin America and even the US in the recovery rally until recently. Do you see that underperformance narrowing or reversing soon?
A. If the recovery continues to gather strength, and we believe this is becoming increasingly likely, we would expect Europe to do well compared to other developed markets. Europe is heavily exposed to exports (Germany is level with China in terms of the dollar value of exports), so will be a major beneficiary of a return to growth in global economies.
Q. What's the state of the European consumer?
A. In Spain, Ireland, and the UK, there has been a housing bubble similar to the US, and this has impacted confidence. However, spending has held up relatively well, particularly in the UK, thanks to low interest rates and falling food and oil prices. Our holding in UK department store Debenhams (LSE: DEB.L) has [benefited from] this resilience, particularly thanks to its focus on the lower end of the market.
Q. Thank you.