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Henderson's Bennett: I won't make money this year

Bearish fund manager John Bennett fleshes out his gloomy view on markets, saying he doesn't expect to make investors money in 2016.

Henderson's Bennett: I won't make money this year

Citywire AA-rated fund manager John Bennett's blunt campaign to persuade investors not to put money in his Henderson European Focus (HEFT ) investment trust continues apace.

Having told analysts at a meeting last week that 'If I were you, I would sell everything and hold cash' according to Winterflood, Bennett fleshed out his heavily bearish view on markets at a briefing organised by brokers Cantor Fitzgerald.

'I do not believe you will make money in my trust in the next 12 months,' he said. 'I don't think it's a year for markets, I think it's a year for stocks and even there I don't think we will make any money, let alone lots of money,' he said.

Whatever the technical definitions of a bear market, Bennett feels we have been in one since the spring of last year, and he believes it could have further to run.

While admitting he has 'no clue' how much it could fall, especially with unpredictable moves from central banks clouding the horizon, he feels markets 'should be facing a 20% to 30% fall', with shares already having suffered around 10% of that drop already.

'I would love a real clear out,' he said. 'I would really welcome that because then you get value again.'

Strong returns could falter

Bennett is a strong believer in 'mean reversion', the theory that prices and returns eventually move back to the average. That influences his view that the strong returns for his trust, whose shares are up 69.8% over the last five years versus around 20% delivered by European shares broadly, are unlikely to persist.

'It's been a very, very good five years,' he said. 'That doesn't mean it can't continue, I just think it won't continue,' he said.

Bennett's caution is rooted in his view we have entered a lengthy capital goods bear market, with overcapacity from China creating oversupply globally, leading to deflation. He cites China's first contract to supply high speed trains to Europe, struck last year with Macedonia. 'China is moving up the value chain and coming after the West,' he said.

One sector particularly vulnerable to this bearish outlook is the automobile industry, according to Bennett. Margins are weak in comparison with other sectors, but still above their long-term averages of 3.9% globally and 1.8% in the US. 'Negative mean reversion is coming in autos,' he said.

Bennett is also fearful of the eye-watering valuations that have built up in the some areas of the defensive sectors of the market, such as consumer staples. 'If we want to buy peanut butter, beer or crisps, we're paying 20 times [earnings]-plus,' he said.

'What price Nestle? Forty times? Fifty times? We could end up with monster valuations on income stocks,' he said, adding that the current market was reminiscent of the 'Nifty 50' stocks favoured in the bull markets of the 1960s and 1970s.

Europe not cheap

Nor does Bennett buy the argument that European stocks are 'cheaper' than their peers in the US. While the headline price-earnings ratio for European stocks may be lower than that for their US counterparts, a lot of that was down to the composition of their respective indices, he said.

Embattled European banks drag down the region's rating, but for good reason, said Bennett. 'Most banks in Europe unfortunately are doomed,' he said.

Look at European and US stocks on a like-for-like basis and there was not a huge difference,' he argued, citing the 25 times price earnings ration on European drinks company AB Inbev (ABI.BR).

'You don't have a lot of discount in quality,' he said. 'US pharma is still on a premium to Europe but it's not huge.'

The pharmaceuticals sector is one of the few areas of the market where Bennett retains some enthusiasm. He is 6.5% 'overweight' – holding proportionally more than the market – in his European Focus trust, with Novartis (NOVN.VX), Roche (ROG.VX), Bayer (BAYGn.DE) and Novo Nordisk (NOVOb.CO) featuring in his top 10 holdings.

Bennett believes that despite being labelled defensive stocks, pharmaceutical stocks are actually cyclical, and in the 'foothills' of a prolonged bull market.

Oil has also made an appearance in the trust, with the trust taking a stake in Portuguese oil company Galp Energia (GALP.LS). 'We're not equipped to call the oil price,' he said. 'That's us just getting engaged and watching the situation.' But he added that some areas of the oil sector looked like they could present opportunities. 'It's beginning to me to look like it's priced to never recover,' he said.

2 comments so far. Why not have your say?


Feb 03, 2016 at 04:51

So, what's the cash position within his IT, and what level of cash is he targeting within weeks - IF he really believes what he is saying. If he doesn't, then this is an extraordinary episode and I wonder whether he is on the way out from Henderson?

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The Old Man

Feb 03, 2016 at 09:55

I agree with Micawber, it is certainly unusual to see managers denigrating the prospects for their own trusts. But having experienced such strong growth in European markets in 2015 now would seem an unlikely time to make a large investment. Perhaps he just wants to create panic so that he can find some bargains again, or am I just being cynical?

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