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