Europe will be the only area where growth will accelerate in 2015 and, as long as the outside world does not decelerate too quickly, the equity rally will continue. That is the conviction of Igor de Maack, Fund Manager at DNCA Invest Convertibles (Natixis). In this interview with Funds Society, the fund manager explains that he has more convictions in the domestic sectors in Europe or influenced by M&A (media, construction, telecoms). And in peripheral Europe vs core. But he advices: it would be dangerous to bet on an overly strong EPS recovery: “Some countries, especially in the emerging world, will not be EPS contributors for global companies”.
How optimist are you regarding Europe’s growth, and what about European companies?
Europe will be the only area where growth will accelerate in 2015. International and European bodies have all upwardly revised their growth prospects (>1,5%). When we compare EPS expectations, Europe will be the only territory where we can expect upward revisions. Why, just simply because the level of cumulated profit of the European corporates is 30% below their pre- crisis level. Even with a weak Euro, interest rates at historically low levels and cheap oil, Europe can still grow even with demand at relatively low levels.
Will the credit boost be the main driver of the economic recovery? Which other factors?
The distribution of credit is key for recovery in any type of liberal modern economy. With the introduction of LTRO and of European Quantitative Easing, data has shown some positive momentum in credit distribution by the European banks. It means that European consumers start to believe in better times and look for new projects. The other main driver for the current recovery in Europe has to do with politics. Structural reforms must be imposed and politicians need to provide the corporate and the individuals with adequate economical and fiscal frameworks.
How could this growth scenery affect equity markets in the next few months? Do you expect a rally in European equities?
When there is economic growth which is efficiently spread across economic sectors (private and public), this growth should be reflected in firms’ profit generation. If companies can borrow at low cost in order to easily finance their organic or external growth, then one should see a strong increase in their profits and therefore attractive valuation multiples. As long as the outside world does not decelerate too quickly, one can expect the equity rally to continue.
There is much consensus about the attractiveness of European equities at the moment… Could this be dangerous?
Valuation cannot be described as very cheap but they are cheaper following the recent correction. What is dangerous is to bet on an overly strong EPS recovery. Some countries, especially in the emerging world, will not be EPS contributors for global companies. Some sectors are already overpriced including, technologies, biotechs or high growth themes, Chinese equities. Beware of these bubbles.
Do you think central banks and the ECB are contributing to generate a bubble? Should investors take advantage of this context or protect themselves against an uncertain future?
The bubbles are created and destroyed by the economic agents themselves. Central banks are just here to ensure that the monetary systems have continuity. Their intervention are some times more relevant and meaningful. Investors should therefore take profit in these periods when money is cheap. It might be an historical moment.
Do you think last corrections due to the Greek crisis could generate opportunities to buy?
Yes but it never lasts long. The Greek crisis will come back. There will be other moments to invest into riskier assets (equities) but the rule is to invest progressively.
How do you see Greece’s agreement with Europe and what do you think it could mean to the markets?
The “Agreekment” was a relief for the markets but not for the Greek people. Their government has lost the battle and the war. Restructuring the Greek debt is inevitable in the near future. Europe has refused the “Diktat” from Tsipras but will need to send a strong message to all European people.
How does the Euro contribute to the impulse of the markets and in which levels do you see it vs dollar?
Euro is weak and therefore it is a competitive advantage for the exporting companies in the Euro zone. It also creates some imported inflation. Euro is a disguised Deutsche Mark. It should normally be stronger vs dollar when we look at the fundamentals of the Euro zone.
In which companies or sectors do you have more convictions?
In the domestic sectors in Europe or sectors influenced by M&A (media, construction, telecom). Banks are cheap and are value investments even though the pressure of regulation should imply a discount. With the recovery of credit distribution, they should see more interest income in their P&L.
Core Europe or peripheral? And what about Spain?
We prefer peripheral Europe to core but good investment deals are all across Europe. Spain is an investment territory for us but we must see political clarity after the elections.
Which all ECB measures… but also with the environment of the recovery of the corporates earnings, do you think is the moment to invest more with a macro or micro approach?
Micro-approach should be the winning lottery ticket. As we are now more confident in the macro approach, stock picking shall be the way forward.