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Investors, don’t be duped by Europe’s economic fragility

Weak economic growth hasn’t stopped equity market gains in Europe, says top-rated fund manager David Dudding of Threadneedle.

Investors, don’t be duped by Europe’s economic fragility

European economies may be going ‘absolutely nowhere’, but don’t be fooled into believing that such weakness will hamper shares in European companies.

That’s the message from David Dudding, holder of a top Citywire AAA-rating and manager of the Threadneedle European Smaller Companies fund , a pick of our Citywire Selection team.

Dudding said Europe’s poor macro backdrop masked a number of positive factors for equities on the continent and investors were subsequently far too pessimistic on the short term prospects for European equities this year.

The FTSE World Europe ex UK benchmark was in fact up almost 11.5% in the year to the end of October, despite the region's well documented problems.

Dudding said: ‘People have to recognise that there is no correlation between short term growth rates and stock market performance.’

Look at China

Dudding cited China as a good example of where superior growth rates did not necessarily translate into strong equity performance.

‘No one would dispute China’s economy has done much better than European economies over the past three years and yet the stock market has gone nowhere. That is in part because it started off at very high valuations.

In Europe, European companies have performed well because money is very cheap to borrow and bond markets have had a significant and sustained rally, Dudding explains.

‘Good quality European corporates are finding it easier than ever before to raise money at very low rates, and with government bond yields at historically low levels, savers are being forced to look at alternative asset classes whether that is corporate debt or equities, as it is impossible to make a meaningful return from government debt.’

Seek emerging market exposure

Dudding said that with it being up to a decade before Europe restored its competitiveness European equity investors needed to focus on those companies growing their exposure to emerging markets.

One such example is Nestle, a top 10 holding in the Threadneedle European Select fund he also runs.

Dudding explains: ‘Nestle has 65% market share of the Chinese coffee market. The average consumption per person per year is three cups of coffee. In Shanghai it is in the 20s, in Hong Kong it is 160 and in Taiwan it is 99.’

‘Nestle has been growing this business at 15%-20%  a year so it doubles every five years but it is still only around 6% of Nestle’s operations. It is a tremendous way to get exposure to Chinese consumption [and] is ideally placed as it has been in China for many years and has a very strong brand name.

Over five years to the end of October the European Smaller Companies fund has returned 35.4% compared to the benchmark’s -11.8% loss. The Threadneedle European Select fund has posted a return of 25.35% compared to -7.5% by the FTSE World Europe ex UK index.

14 comments so far. Why not have your say?

Geoff Downs

Nov 29, 2012 at 10:12

For me we are seeing sucker rallies. Even if markets rise another 10%, I wouldn't go near some of these investments.

The retail investor is especially at risk and should tread with great care. I suspect though they will buy the hype.

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Self Invested via mobile

Nov 29, 2012 at 18:00

Dear Mr Dudding. 1.You run a small companies fund so why are quoting Nestle? 2. You don't say whether you regard Nestle as a buy, hold or sell together with your reasons. 3 I would be interested to know what the average PE is within your fund by comparison to the average PE of a fund of large Euro corporates. Thanks.

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Jeremy Bosk

Nov 29, 2012 at 18:04


So where would you invest? Most of the world's corporate managements and most of the world's politicians are clearly both corrupt and insane.

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Geoff Downs

Nov 29, 2012 at 18:36


What has truly amazed me in recent times is the way masses of people continue to invest in this market and clearly believe they will make a pot of money.

For me at present world stock markets are flawed, perhaps they always have been, and are not performing in a manner that reflects the true economic conditions.

We clearly have manipulation in the markets in an unprecedented way.

Unlike the vast majority of people I think deflation is coming, although I admit we have energy and food inflation at present.

For safety I would suggest cash and Government Bonds. Of course the majority of so called financial experts/fund managers are suggesting a meltdown in bond prices. which I don't agree with. Also you would not buy Gilts for yield but for capital appreciation, if deflation arrives.

By the way any type of economic forecast is largely guesswork, so others who pour money into equities or commodities may prove to be right.

If I remember correctly you may be in the inflation camp?

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judy garland

Nov 29, 2012 at 20:10

Hi Geoff,

Be interested to hear your reasons for coming deflation..

Particularly in view of the volume of printing going on which surely by its nature increase paper currencies with no corresponding increase in goods + services- highly inflationary??

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Jeremy Bosk

Nov 29, 2012 at 21:16


I expect several years of deflation followed by inflation.

The deflation is being caused by depressed demand due to Austerity. Commodities are depressed by both depressed demand and new production coming on stream in mines and in shale oil and gas. All spare cash in the hands of consumers and businesses is either hoarded against prolonged recession and job uncertainty or used to pay down debt. Business will not invest when there is no likelihood of making a profit because of depressed demand and political uncertainty.

The inflation will come when governments finally accept that Austerity actually increases debt by cutting tax receipts and raising all kinds of social security expenditure. Then Keynesian style reflation will be the only game in town. It will be overdone.

Most government debt will be defaulted upon, either openly as in the haircuts recently accepted with Greek debt or through engineered inflation.

I personally think that nimble small caps and mega caps like Nestlé which are heavily exposed to the emerging markets will survive best. Corporate debt or possibly selected shorting strategies are also possibilities, although shorting is very hard to get right.

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Nov 29, 2012 at 22:14

Most seem to forget that most major stocks have hardly moved over the last 10 years, whilst the average trend has been for increased profits every year. There is therefore a huge reduction already built into the prices. Stock markets usually look ahead, so presumably they aren't anticipating early freedom from recessionary forces or they'd be at least 50 to 70% higher by now. I do agree about the comments about retail stocks. I wouldn't buy any retail stocks at present (apart from maybe supermarkets) nor any bank, building or travel stocks.

I do think bonds still have some running left in them as bank interest rates are likely to remain low for quite a while, but I'd only buy corporate bonds which are below par (I hold enterprise inns, which are supported by the freehold value of some of their inns), a long term Barclay's bank bond and an Aviva bond. None of these are without risk, but so long as the companies actually survive, I'll get a good income from them which is about 3 times what I'd get from a BS deposit. At the dividend rates I've been getting, I'd still be in the black now in the unlikely event of them dipping 30% tomorrow. Otherwise, most of my equities are smaller oil producers with proven reserves (I expect oil prices to rise more, as the easy oil gets used up) various utilities and very stable companies producing essential household goods (e.g Reckett Benkiser). I do, however have a few Hi-tech delights such as Torotrak (revolutionary gearbox technology, just starting to make profits) , Galapagos (who have just found several potential blockbuster drugs, including ones for rheumatism - undergoing encouraging trials - and new set of resistance-free antibiotics. The latter drugs are very newly announced and are still to be proven in any trials, but, if successful, they will be one of the most needed of any medical advance in recent years) and a few others I don't wish to bore you wit.

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Geoff Downs

Nov 29, 2012 at 22:20

I don't believe QE is going to do much for the real economy. We have experienced a massive boom, fuelled by easy credit. Result has been State and consumer debt.

To produce inflation banks would need to expand lending ongoing and consumers to continue to borrow.

I cannot see how those two things could happen, as banks see to rebuild capital and consumers are already indebted.

Of course world banks and politicians will do everything possible to cause inflation.

Devaluation does not have to mean inflation as we saw in the UK in the 1990's.

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Geoff Downs

Nov 29, 2012 at 22:26

Just one further point about stock markets. Markets always need new money to be invested to pay the original investors.

The problem arises when investors sell all together. At that point many are left with losses. In my view that will happen, whether slowly or in a significant crash.

Like lots of things in life we think it won't happen to us.

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Jeremy Bosk

Nov 29, 2012 at 22:58


Please bore us with the details :-) I always like to see what people own,as a check on their judgement.

You will probably find mine an odd mix:









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Jeremy Bosk

Nov 29, 2012 at 22:59

Sorry, I forgot GLIF

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Nov 29, 2012 at 23:27

Geoff, I am with you, not that I can quote chapter and verse.

There is just too much bad out there, massive debts, Europe, USA and UK, forgetting the minnow Argentina. If China does not have a foreign market it must rely on homegrown consumption, and then only a fe of the 1.5 billion can afford their luxury goods.

Africa, many countries are discovering that their Chinese investors/masters are not doing them any favours.

and then there is the EZ, obfuscating like crazy, before it ditches one or more members. Democracy ia not in their genes, more like the fourth Reich, and that requires facism even worse than before. Then civil war. At that time, unless there is a drawback, we are all in the leaky canoe in sh*t creek without a paddle.

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Geoff Downs

Nov 30, 2012 at 08:07


Your second paragraph sums it up nicely.

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Dec 02, 2012 at 16:00

Come to think about it, the private investor is already hugely exposed. There are the Funds, trackers, whatever. Who, at then end of the day, owns their shares? They own big chunks of the big companies and other funds, but who owns them?

Bottom line, the private investor.

Who made the big loans to the countries and are now being required to take haircuts? The big banks and funds, and at the end of the line underpinning them is the private investor.

Aha, I hear someone say insurers. Where does their money come from? In general business maybe companies (but people own them) and life insurance only comes from individuals. How do you insure the life of a company or bank, investment trust/fund?

For all the debts run up by govts, who loses and pays? Again private individuals, and we are supposed to control the govts.

In reality, many people, the vast majority do not own shares, but quite a few have savings, and what to the banks do with that money, apart from the directors over rewarding themselves??

It is time that those who do have something to lose to start dictating sense, I repeat sense, good old communal garden sense. to the spendthrift govts, LAs and banks. They also need to apply pressure on the trusts, funds and banks etc. to do likewise.

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