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Schroders' Bateman: risk of euro break-up all but vanished
Schroders' head of European equities Rory Bateman says the region's stock market looks good value given the risk of a meltdown in the single currency appears to have gone.
Schroders head of European equites Rory Bateman believes the risk of a disorderly break-up of Europe has all but vanished over the past 12 months.
Bateman told Citywire that while Greece remained a 'special case' it was highly unlikely that politicians would allow it to leave due to the likelihood of contagion to other peripheral European countries and for that reason he expected it to receive a significant further write down of its debts in the coming months.
'The resolution to the euro crisis is on track,' he said. 'We never really thought a break-up would ever happen as it would be too significant to contemplate. We are in a muddle through stage for the next one or two years but the tail risk of a break-up has receded if not vanished altogether.'
Bateman has used his optimism on Europe as a reason to significantly increase exposure to peripheral European countries such as Italy and Spain within his Luxembourg-based Schroder European Large Cap Equity fund.
He has taken it from zero at the start of 2012 to 10% by mid December, slightly above his benchmark, and said he was likely to increase peripheral exposure on further market weakness.
Selling down quality, buying value
He has financed the move by selling down some of the quality growth names in the fund such as Unilever (ULVR.L), German software giant SAP and Danish healthcare specialist William Demant after strong runs which have taken them to historically high valuations.
'A lot of quality names are now looking fully valued. SAP and Unilever have done very well and we still see significant upside, but they now look to be at fuller valuations and we are looking for more value opportunities, particularly in peripheral Europe.
Positions in globally focused southern European firms such as Italian tyre maker Pirelli and catering group Autogrill, as well as Spanish oil services group Repsol have been added on Bateman's view that they have been unfairly sold down simply due to their country of listing while the fund's second largest active overweight position is in French bank BNP Paribas.
'BNP has written down a lot of peripheral debt and while it has significant exposure still to Italy, we don't see that country going back into an armageddon scenario, and it is an extremely well capitalised bank.'
The fund remains underweight banks overall, preferring to gain financials exposure through insurers and the strongest capitalised Nordic banks such as Swedbank.
'We are also trying to play financials through restructuring in the insurance space such as ING and Prudential (PRU.L). We bought into Prudential at very attractive levels post its AIG activity in Asia.'
Bateman has recently added to French pharmaceuticals giant Sanofi as he views it as comparatively cheap compared to its peer Novo Nordisk.
'Sanofi has now put its patent cliff issues behind it and we think we are paying a low multiple for a company that has a number of drugs in its pipeline. It is a key value trade in the pharma space.'
Bateman expects European corporate earnings growth to recover within the next three years and is encouraged by the relative valuation of the region's equity markets compared to the US and Asia Pacific.
'The European market is trading on 11 times 2013 earnings which is still 40% below its 2007 peak while the US is now at a 10% premium to its 2007 peak. Over the next one to three years we expect to see earnings growth coming through as Europe returns to a normal business cycle.'
Over the three years to the end of November, the fund has returned 15.8% while the FTSE World Europe has risen 12.6%.
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by Gavin Lumsden on Sep 12, 2014 at 17:41