Henderson: Outlook 2017 – European Markets

What lessons have you learned from 2016?

As a metropolitan liberal I have discovered I have very little understanding of electorates around the world. The year has highlighted the danger of ‘following the herd’ and being too consensual. So after a number of years of momentum investing dominating, we have learned that thankfully there is still a place for our more contrarian style of investing and that valuation does matter.

What are the key themes likely to shape the markets in which you invest in 2017?

Major economies in Europe are generally in good shape and, with a greater focus on fiscal expansion globally (especially in the UK but also in the US following the election), it seems likely that inflation expectations will continue to move higher. This is a good thing for those that want to normalise monetary policy and inflate away some of the debt pile. However, it is unclear to us the full ramifications for the bond market and the knock-on effects to equities.

Elsewhere, quantitative easing hasn’t had the desired effect for the European Central Bank, causing asset bubbles and leading to investors scrabbling around for value. When people are nervous, they run away from smaller caps, but there are always companies out there that are growing, or offering interesting opportunities for selective smaller cap investors.

We also expect the UK’s Brexit decision to have further consequences for European markets. Europe needs to reform and perhaps this is the test it needs to turn talk into action.

What are your highest conviction positions moving towards the New Year?

We are overweight industrials and consumer discretionary. We have avoided paying higher multiples for ‘reliable’ consumer staples. We favour industrials because there seems to be a lot of fear about. The risk of a recession seems factored into prices, whereas investors are paying absurd prices for companies with limited growth potential, such as food producers. Furthermore, if China and the US continue to grow, European industrials could do well. Our view of value, however, remains stock specific. We also see some opportunity in technology, again on a stock-specific basis.

What should investors expect from your asset class and your portfolio(s) going forward?

There is a sense that the market has grown a little weary (and complacent) about the shambolic state of politics globally, yet the calendar remains replete with elections across Europe in 2017 – Germany, Netherlands, France and Norway, among others. Providing outcomes favour the markets then we expect economic growth to continue at low but gradually accelerating levels (with the potential for a relief rally). Money supply is growing, which is usually seen as a precursor to economic growth. We may also start to see European value stocks garnering more attention.