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'Genuine' growth, not easy money, powering Europe

Columbia Threadneedle manager Philip Dicken hails the earnings growth being delivered by small and medium-sized European companies.

'Genuine' growth, not easy money, powering Europe

Europe is now seeing ‘genuine’ growth after a stalled recovery, according to Philip Dicken, manager of the Columbia Threadneedle Pan European Smaller Companies fund.

‘The European market went up for many years because it benefited from low interest rates - markets were going up but earnings were not,’ said Dicken.

‘Only now are we seeing earnings growth and it is a much better environment, there is a genuine reason for stocks go up, rather than just interest rates.’

Dicken pointed out the strength in industrial growth but said that companies would have to invest more to keep up with growth in the economy.

He illustrated the ‘tightening in the market’ through Finnish company Cargotec (CGCBV.HE), which supplies cranes for the back of lorries.

‘They had problems because they could not supply cranes because they could not get the crane components,’ said Dicken. ‘But there was a shortage of trucks too so everyone had to wait, so Cargotec didn’t lose any market share - but it does show the tightening in the market.’

Dicken is overweight financials but underweight banks, preferring ‘financial services and insurance’ although he said banks were ‘selectively investable but not across the board’.

This is due to regulatory headwinds, namely the European banking regulators wanting banks to hold more capital. Dicken said the regulatory rollback in banking regulation seen in the US would ‘not be seen in Europe for some time’ so it was difficult for the banks to make a profit.

‘Banks are up against a regulator that is focusing on the next crisis,’ he said.

He added that he was underweight utilities and telecoms companies but has overweights in business services and building materials companies, like insulation group Kingspan (KSP) that should ‘benefit from a growth pick up’.

Dicken said the eurozone crisis was the reason Europe was only now starting to see growth, as other regions were able to start their recovery in 2012.

‘US companies improved their profit margins [in 2012] but the eurozone fell back with the eurozone crisis and it has taken some time to come back - it has only been in recovery in the past few years,’ he said.

The recovery in Europe, however, is not spread evenly, with Germany being the major beneficiary due to its large export market and flexible workforce. It is now ‘questioning where to spend its money because it has got too much of it’, said Dicken.

He compared this to Italy which suffered a ‘much bigger hit from the eurozone crisis because of government debt, a less flexible economy, and difficulty in hiring and firing’.

This has led to a rise in populism in the country, where more than half of people voted recently for populist parties.

Dicken said there was a need for greater reform in Italy to make sure any growth in the country was equally distributed.

‘Only last year have they sorted out bank balance sheets and sold off parcels of bad loans, and they are moving forward and banks are starting to lend again,’ he said.

‘Italy has really lagged because banks did not have profitability.’

He added that in Europe the ‘political environment will remain noisy but on the ground things are getting better’.

Dicken has run the  Columbia Threadneedle Pan European Smaller Companies since November 2005. Over 10 years he has returned 240%, placing the fund 11th of 50 in Citywire's European Small & Medium Companies sector over that period.

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