RWC’s Ajay Gambhir says the dispersions in European equity valuations are at their highest level in 30 years, throwing up opportunities for long/short managers.
Gambhir, who runs the RWC European Absolute Alpha fund, said: ‘The dislocations in European equities have been so severe in the recent past that the opportunity for long/short investors, between sectors and stocks, is greater than it has been for at least five years.
‘We can see several ways to take advantage today; the dispersion of valuations between European sectors is close to the highest level in three decades, excluding the TMT bubble; the spread of valuations within sectors is higher for the majority of sectors than six years ago before the financial crisis; and 60% of the Eurostoxx index of European stocks has dividend yields higher than the average European BBB corporate bond yield.’
He said although the market is cheap on average, there are many expensive stocks within it which present shorting opportunities. Gambhir is also backing European economic growth to continue improving, albeit with the caveat that it will be capped by continuing austerity, structural issues and ‘global headwinds from the Brics’.
Over one year the RWC European Absolute Alpha fund has returned 14.02% compared to a City Alternative Ucits Long/Short sector average of 9.79%, both in sterling terms.