SW Mitchell European manager Stuart Mitchell believes European banks can continue to surprise on the upside.
The Citywire A-rated fund manager (pictured) is so confident of this he is allocating 25% of his fund to large retail banks that have connections to small and medium-sized enterprises, believing these banks will benefit from cheap funding.
Mitchell said valuations do not currently reflect the recovery in the banking system or any kind of growth over the next few years.
ING, Intesa Sanpaolo, Monte dei Paschi di Siena, alongside Lloyds, feature among his top picks. Having bought into banks two years ago, the fund has made between 100% and 150% on the sector allocation. ‘We think this should double again,’ Mitchell said.
The call forms part of a bias towards domestically orientated areas of the market over international growth stocks, which he views as too expensive, ‘especially considering the many political and economic challenges facing the emerging world at the moment’.
In contrast, domestic European stocks account for almost two-thirds of the fund. The manager said this was a call he felt was worth taking as they were trading at a 50% discount to their US equivalents.
He is also allocating 24% of the fund to stocks that are listed in Europe’s periphery and he has dared to access unloved areas such as Spanish property group Sacyr Vallehermoso. ‘It has done well, as everything has worked out as we would hope,’ he said.
‘We also hold FCC. This needs more capital and we anticipate some kind of rights issue but, post this, we expect the share price to rise higher.’
Internet flight booker Amadeus is another of Mitchell’s favoured picks in this category. ‘If you look at what has been happening over the last few weeks, there is such a negative view on Europe, but on the ground you can see what is happening.
‘There is a big gap between what the consensus is saying and what is happening in companies,’ he said.
He is also bullish on telecoms. He expects a changing backdrop where regulators are likely to stop trying to break monopolies and will prove supportive. Since the German market went down from four to three operators after Vodafone’s acquisition of Kabel Deutschland Holding, he expects this to give the green light to other countries.
The fund has around 6.5% in utilities and Mitchell highlights German power generator RWE as a stock he likes. The share price is down substantially from its highs, as the government has encouraged a move to alternative energy.
However, he said with nuclear power stations closing in Germany, power generation should receive compensation and RWE could prove a big beneficiary of that, alongside E.ON, which he does not hold.
Having made money on RWE so far, Mitchell is posed with a dilemma. ‘Should we sell RWE and put it into the banks?’ he asked.
Looking ahead, the fund manager and founder of SW Mitchell views a US slowdown and sell-off as one of the biggest risks to European equities. He said this is a recurring theme mentioned in company meetings.
Likewise, he acknowledges that the recovery needs to surprise on the upside for his portfolio – which is heavily skewed towards cyclicals – to perform well.
‘For us to do as well as we have done over the last two to three years, the recovery has to do better than expected,’ he said. ‘Certainly, over the years it has done this and we tend to get a better picture from companies than the European Central Bank and economists. The view from companies is a bit more upbeat than backward-looking economists.’
In his view there is still an opportunity for the valuation gap between Europe and the US to narrow and he remains bullish.
‘I think the market correction is probably finished. With second quarter results coming through. we think the market will recover what it lost over the summer period,’ he said.
Over the past three years the fund has posted a 33% return versus 24.3% by the average fund in Citywire’s Equity – Europe sector.