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Fly on the wall: how London & Capital is taking on the eurozone

Fly on the wall: how London & Capital is taking on the eurozone

Wealth Manager was given exclusive access to London & Capital’s latest asset allocation meeting.

Kicking off an open debate on Europe, London & Capital chief investment officer Pau Morilla-Giner (pictured) told the firm’s seven-strong investment team that he was less than convinced by those who say the peripheral markets are stabilising. 

‘Things are not really any better; the macro data continues to be weak,’ he argued.

‘There are people talking about the periphery stabilising. Certainly the capital markets have given this impression, and that the periphery is becoming more competitive, but I’m not convinced.

‘Just because the current account balance has improved, it doesn’t mean they have become more competitive.’

Mixed views on Europe

Head of fixed income Sanjay Joshi said he held the opposite view and was becoming slightly more positive on Europe.

‘The macro numbers are not good, there’s no question about that,’ he said, but he argued that risk premiums have fallen, Spain has been able to return to the debt markets successfully and there are signs of stability.

‘Things are not getting worse in the periphery, they are stabilising which is pretty good news. With the financial crisis in the background and the European Central Bank continuing to be a major factor, it allows a few more pro-growth policies to start seeping through,’ Joshi said. ‘The data is very scatty but the purchasing managers indices (PMI) are suggesting that things might just turn around now, even in the periphery.’

Be patient

Senior portfolio manager Rabbani Wahhab stressed that the timescale on any improvement in Europe would be lengthy.

‘There’s going to be a long lead time before we see practical signs coming through from France all the way down south. That’s going to be a few months away. It’s not going to be an overnight story,’ he said.

The group agreed it was ‘a difficult one’ but equity analyst Carlos Salas said he felt it was a ‘fool’s game’ to try to assess the state of Spanish and Italian markets using their main indices as a barometer of health. Their markets are simply too different.

‘If you try to measure Spanish confidence and activity using the Ibex or Bolsa de Madrid, I think it’s a fool’s game because GDP in Spain and Italy is composed of small and medium companies. It’s not like in the UK or US, where whenever a company becomes relevant it goes to an initial public offering,’ Salas argued.

‘I think sometimes you can see that the markets in Spain and Italy are getting better, but the economy and the financial realities are something different. I’m more positive on Europe’s financial markets than the economic situation,’ he added.

Head of global trading Stephen Collins entered the discussion, arguing that the team needed to be more stock specific when considering the merits of the peripheral markets, and Salas agreed the debate about entering Europe should centre on sectors rather than countries.

‘People forget that even before the crisis Europe was losing competitive advantage – and I’m not just talking about Spain, I’m talking about the Netherlands, France and Italy,’ Salas said. ‘It’s not that because the financial crisis is gone, Europe is going to be okay –that’s a fallacy.’

Buying Fiat

While London & Capital has had little exposure to the region, Joshi said his team had been slowly adding eurozone-listed stocks to portfolios. The team recently bought Fiat and has just sold out of a position in Santander’s debt, making 7% ‘purely because it had rallied already’.

Salas has been bullish over the last year on exporters to Asia. ‘A lot of new companies buy machinery from Europe because it’s so cheap due to the euro. And I think the euro should also be weak this year.’

That said, he feels exporters are starting to look expensive now, with stocks such as Cougar and ABB trading on price to earnings ratios of 16 to 20x. 

‘So to enter into that game now means you can rely on them but if something happens to the euro your strategy could backfire.’

The team owns global clothing company Inditex, which Salas says is expensive.

‘It does perform very well but it is so expensive,’ he said.

Turning to hedge funds, which the London & Capital team allocate to within portfolios, senior hedge fund analyst Vijay Patel said managers were increasingly bullish on Europe.

‘They are not exactly net long, but they are seeing an increasingly rich opportunity set. Carlos says dispersion is bad, but it’s only bad for the long guys,’ he said.

‘For the long/short guys, dispersion is a Godsend.’

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