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Norris shuns ‘zombie banks’ in favour of quality growth stocks
European banks are too volatile to back despite the recent rally, says IM Argonaut European Alpha fund manager Barry Norris.
A pronounced underweight to European banks has caused Barry Norris's IM Argonaut European Alpha fund to underperform over the past six months, but he is sticking with his belief that the sector is too volatile to back.
The fund also has no exposure to peripheral Europe and this region has been among the best performers following liquidity injections and positive noises from the European Central Bank in recent weeks.
But Norris remains happy to avoid banks, which he describes as ‘zombie equity’, and is maintaining his large overweight to the region’s strongest economies and a handful of quality stocks in core Europe from the insurance, autos and retail sectors.
March of the zombies
‘We have had a disappointing six months on a relative basis, but we still view banks and Southern European equity as zombie equity. It is very hard to make a case for banks as we believe they have not made enough provisions for bad debt and unless there is higher growth, their provisions will have to remain high,' he said.
‘But we call them zombies because they are not totally dead and every couple of months they come back to bite you in the backside.’
Norris has held no banks for about four years, and now thinks they are not even trading on cheap valuations.
‘It is very important to stick with our process. We look for stocks with superior earnings momentum and we are happy to pay up for these higher quality companies.’
Adding Volkswagen, Hanover Re and Unibail
Recent examples include German auto group Volkswagen and reinsurer Hanover Re, and French high-end commercial property firm Unibail.
Norris started adding Volkswagen three months ago and it is now 4% of the fund. He was initially attracted by the higher margins being gleaned from the Porsche and Audi brands it now owns.
‘In a low-growth environment, ironically it is growth stocks that do better. Porsche makes 20% margins and Audi 12%. These are great brands recognised all over the world and Volkswagen has transformed itself into a higher margin business.’
Norris says the Volkswagen brand itself is now taking a bigger share of the mass market as it has been able to borrow at more competitive rates than French rivals such as Citroën and Peugeot.
While Norris holds no banks, Hanover Re and Norwegian reinsurer Gjensidige make up 4% of the fund each.
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