Threadneedle's AAA-rated Heslop eyes 'painful' correction for equities

Threadneedle Pan European Smaller Companies  manager Mark Heslop thinks equities markets are due a significant pull back which would have ‘painful’ repercussions for investors.

Heslop, who also took the reins of the €1.6 billion Threadneedle European Smaller Companies fund from Dave Dudding at the start of the year, thinks the market is unlikely to be significantly higher in 12 months’ time but that small caps will continue to offer the best chance to add alpha in difficult markets. 

He told Citywire Global: ‘We could see the market continue to go up but it will be rocky with the fiscal cliff, and Italian and German elections to factor in so we expect a fairly sizeable pull back which will could be quite painful.'

‘I would not bet on the market being higher in 12 months’ time but there will still be opportunities. Our process means we look at where a company will be in five years’ time. Smaller companies present a much larger opportunity than large caps because they are much less covered by analysts and offer more opportunities to generate alpha.’

Equities still historically cheap

Overall the Euro Stars AAA–rated manager is cautiously optimistic because he believes equity prices look attractive on a historical basis. However he adds that equities should look cheap, considering the years of low growth ahead for much of Europe.

‘The market as a whole should continue to rise and the positive flows into equities will be a key driver.’

Heslop has been adding selective stocks to the portfolio from the European autos and luxury goods sector which he believes are too cheap to ignore.

A position in Swedish safety belt and airbags specialist Autoliv was bought in January as Heslop eyed the company’s expansion into emerging markets while he has also been adding to Dutch cable firm Ziggo in recent weeks on market weakness.

He said: ‘European autos have been attractively valued for some time. We see good value in this sub sector, but we want to own the companies with the best pricing power and strength of the business model is absolutely crucial.

‘Autoliv is benefiting from significant growth into emerging markets and from the tighter safety standards being adopted globally as well as the improving road infrastructure which allows cars to go faster.’

Elsewhere Heslop has been rotating some of his holdings in the luxury goods sector, selling out of high end Italian cashmere producer Brunello Cucinelli after a strong market run and initiating a position in fashion brand Ferragamo, which he thinks is on a far more attractive valuation.

Testing company Bureau Veritas has also been sold down after a strong run but remains a core position within both the Sicav and the Oeic.