Thanks to advances in medical care and nutrition, we are all living longer and healthier lives, challenging previously assumed notions of what constitutes a ‘natural lifespan’.

While this pattern of growing life expectancy is encouraging, a combination of improved healthcare and the long-term effects of the post-war baby boom has contributed to a greater number of people reaching advanced age. Fertility rates are also falling, resulting in a rise in the average age of the world’s population. As this global demographic shift progresses, it is creating some unique challenges – and long-term opportunities – for the pharmaceuticals industry.

We have been arguing since 2010 that the pharmaceuticals sector in Europe is undervalued, given its growth profile and misguided negative sentiment towards a so-called ‘patent cliff’. While it may be true that the ‘low hanging fruit’ era of the drug development market has passed, there is plenty of room for improvement in existing treatments and more targeted therapies that will be part of the next evolution of patient care. As with most things in life, new drug development is cyclical, and the number of treatments in the pipeline has been slowly but steadily trending upwards since 2007. Moreover, the global market for medicines is increasing, with conditions such as arthritis, diabetes and cancer more prevalent in the elderly.

Source: Henderson Global Investors, BofA Merrill Lynch Global Research, a 30 de abril de 2013

Research from the Survey of Health Ageing and Retirement in Europe found that more than two-thirds of people over 50 in Europe have at least one chronic health complaint. In the US, according to the Centers for Disease Control and Prevention (CDC), nearly half of American adults over 65 have more than one long-term persistent health issue, from cardiovascular disease to diabetes or hypertension.

European pharmaceuticals are at the forefront of treating chronic illnesses such as diabetes, a growing pandemic that affects over 60 million people in the region and over 350 million worldwide. To give some indication of the sums spent on treating this condition, the US spends over $10,000 annually on treating each patient with diabetes. Medicines such as Lantus and NovoRapid, created by Sanofi, the French pharmaceutical company, and Novo Nordisk (Danish) respectively, are leading medical products in the field.

Expenditure on Diabetes Treatments

Healthcare expenditure varies from country to country, but the amount spent globally is rising, as a percentage of gross domestic product, with total expenditure reaching US$6.5 trillion a year in 2010, according to the World Health Organisation. European pharmaceuticals are well positioned to help combat the evolution of diseases in the developing world, which are increasingly matching those in more advanced countries. Countries such as China, for example, are facing their own age-related timebomb, a consequence of Chairman Mao’s one-child policy, created in 1979. One third of the population is expected to be over 60 within 40 years.

Source: WHO Global Health Expenditure Atlas, 2012

Encouragingly, pharmaceutical firms have taken appropriate steps to reduce their reliance on blockbuster drugs. Approximately 44% of revenues for European pharmaceuticals come from a globally diversified range of revenue sources, such as consumer and animal health brands, vaccines, diagnostics, low-cost generics and the emerging markets. This is expected to rise beyond 50% by 2020.

Pharmaceuticals are also somewhat insulated against the wider economic woes that persist in Europe and elsewhere. While it is possible for consumers to cut back on their discretionary spending, such as holidays or eating out, most people place more value on their health. In 2010, older US consumers averaged out-of-pocket healthcare expenditures of $4,843, an increase of 49% since 2000. Even in the context of government spending constraints, it is reasonable to assume that support for healthcare spending will remain intact. In the UK, it is unlikely that any of the political parties would countenance a cut in the NHS budget with an election only two years away. An ageing population means more voters over 65, who will be anxious to protect or augment state provision for age-related healthcare.

Right now, we believe that the pharmaceuticals industry in Europe is perhaps two or three years into a decade-long renaissance, with good long-term prospects for revenue growth from sustainable sources. The quest for better therapeutic approaches is never-ending and big pharmas have a significant role to play in how illness and disability is treated in the future.

John Bennett, portfolio manager of the Henderson European Selected Opportunities Fund

Investors’ love affair with gold has cooled. As always, deteriorating performance has precipitated the change of mood. Gold has fallen around 24% since October last year. This disappointing outcome has felt all the worse because almost everything else has risen since European Central Bank president Mario Draghi assured us that the euro would last forever.

After roughly 10 years of rising prices, perhaps investors had grown complacent. The fact that many were recent converts to gold’s appeal meant there were plenty of weak holders liable to be shaken out by poor price action. An unfortunate set of circumstances – several near simultaneous bearish reports from investment banks, coupled with rumours of clumsy selling in derivative markets – did just that, and set the rout in train. So much for the sanctity of the safe haven asset.

Looking ahead, the short-run behaviour of gold is likely to be determined by the state of investor sentiment and positioning. Following the recent sell-down, both of these favour a stabilisation of the gold price: a high level of bearishness among investors is currently allied with significant short positions by speculators. That said, technical analysts point to $1500/ounce as the level gold must reach before downside risk has diminished in their eyes. Technical analysis has its limitations, but it may be a little more influential than normal in a market such as gold, where the asset is famously difficult to value.

Figure 1: Speculators short; investors bearish

 No of contracts                                                                                    US$

Source: Henderson, Bloomberg, Thomson Reuters Datastream; London gold bullion in US dollars; Commodity Futures Trading Commission, non-commercial short contracts; Weekly data 31 December 2006 to 18 June 2013.

Many investors, ourselves included, have viewed gold as an asset that has interesting hedging properties in an uncertain world. The unprecedented wave of central bank ‘money printing’ that has occurred in the wake of the global financial crisis may produce some surprising outcomes in the longer term, even if the bankers would have us believe otherwise.

In a world where a sizeable group of investors still fears eventual deflation, and believes that this will lead to a further bout of aggressive money printing, gold seems like an appealing store of value. Likewise, another camp of investors favours the metal for quite different reasons. They fear inflation is the inevitable consequence of current central bank policies and view hard assets (those with intrinsic value), including gold, as one of the few refuges available for the tough times that, they believe, lie just around the corner.

The last 12 months has suited neither group. The consensus appears to believe that the central banks’ actions will produce the best of all possible outcomes – accelerating non-inflationary growth that will facilitate an ‘elegant’ exit from unconventional monetary policies, and eventually, higher interest rates. In this scenario, the one thing you don’t want to be holding is an asset with no exposure to growth, paying no yield.

In recent times we have been willing to give this view a chance. Our positioning has favoured risk assets such as equities and we have de-emphasised portfolio hedges, including gold. But the going is becoming tougher for that stance. Increasing evidence of a sustained private sector recovery in the US, (especially if it happens when the effects of the ‘sequester’ begin to fade) will surely precipitate a change in the interest rate environment. That could be the worst outcome for fixed income, which hasn’t yet suffered a meaningful setback. If the prices of goods and services remain stable as growth picks up, gold will remain unloved, but any signs that accelerating growth is igniting inflation will renew interest in hard assets and gold.

On the other hand, if global growth forecasts continue to decline steadily as they have done for two years now, and inflation falls even further than it already has, then the deflationists will re-emerge, emboldened by the data. The reaction function of the world’s central banks to such developments is well-established – more money printing. Gold would be back on the bid in such circumstances.

For now we continue to enjoy the ‘Goldilocks’ backdrop (ie, growth is neither too hot nor too cold). If policymakers turn out to be truly brilliant, or if the organic, biological nature of capitalism proves up to the task of generating a renewed cycle of sustained non-inflationary growth, then there will be little need for gold in investors’ portfolios. Right now the market appears to be looking on the bright side. For our own part, we are not so sure and so gold remains a part of our strategy. Like most people, we look forward to the day when we no longer feel we need gold. It just hasn’t arrived yet.

By Bill McQuaker, Head of Henderson Multi-Asset

In the late 90s the European stock market accounted for 36% of the market capitalisation worldwide. It thus vied for protagonism with the US stock market, which had a 41% share. They left a decade behind them in which European stocks had traded at a premium to their US counterparts. Fifteen years later and the scenario is rather different: while the US stock market now accounts for over half of stock market value worldwide, the European exchanges all taken together do not even amount to one quarter of this figure, their value languishing even below that of the Asian markets.

The beginnings of the uncoupling of the US from the European stock markets can be traced back to the opening weeks of 2010, when the level of Greek debt started to become a cause for concern. Over the following three years the steady stream of financial disasters in Europe has opened up the spread between both markets. From 2010 Long USA – Short Europe has translated into a substantial 50%.

                       Source: www.perpe.es

During these three and a half years equity has mostly been funnelled into the US stock market (ETF flows illustrate this well – see chart), driving up stock prices and making it one of the most expensive stock markets in the world. The S&P 500 stands at a current P/E ratio of 18.9 and a Shiller P/E ratio of 22.7, both comfortably above their historical average. If we go by the replacement value (Q ratio), the US stock market is also at historically high levels. And according to Mr. Buffett’s favourite ratio for valuing the market (Market Cap to GDP), it has surpassed the third highest level in history after 2000 and 1929.

Even though this may not mean that the US stock market is set to fall in the coming years, it is reasonable to assume that its future performance will be fairly modest. Assuming long term growth on fundamentals of 6%, with a current Shiller P/E ratio of 22.7 and a dividend yield of 2.2%, the S&P performance over the next 10 years should be a moderate 3.9% a year.

On the other side of the seesaw, we have the European indices at under their historic highs, condemned to be listed against the backdrop of a possible disappearance of the Euro, with the sole and timid exception of the DAX. If we apply the Market Cap to GDP ratio to Europe we see that it stands at way below the high of the year 2000. Its major markets (Germany, the UK and France) stand at Shiller P/E ratio levels of close to 11 and show dividend yields that double the rates offered by the US market. Such flat prices were last seen in the early 80s at just the time when European shares embarked on a ten-year period in which they showed a premium in the market compared to US stocks (see chart).

The S&P 500 currently stands at 1.4 sales compared to 0.7 for the Eurostoxx 50. Working off the assumption that we live in a world that is increasingly globalised and where multinationals rely on world growth (not local growth), the gap in valuations between both markets is surprising. This point takes on particular relevance if we bear in mind that 44% of the revenues of European companies are produced outside the continent (in the case of the UK this figure rises to 52%). In addition to this, one quarter of the profits of European companies derive from emerging markets, a figure which doubles that obtained by US companies from these markets.

These average figures match our fund EDM Strategy’s exposure to exports (45%) and to emerging markets (25%), based on the sales of the companies we have in our portfolio. Therefore, European companies are priced at a discount simply due to where they are domiciled, often without paying heed to the geographical origin of their business.

But perhaps one of the best signs to measure valuations properly is corporate transactions. In comparison to the frenetic corporate activity we have witnessed in the USA for some time now, this has fallen off sharply in Europe (by -14% in 2012) down to levels unseen since 2003. This shows that sellers are not willing to dispose of their businesses and assets at these prices and are probably holding out for more realistic valuations. It should therefore come as no surprise that the book value of the S&P 500 is 2.2, compared to 1.6 for the FTSE-Eurofirst 300.

There is therefore no doubt that the market values on the “Old Europe” are highly attractive compared to those in the USA, and these actually stand at a low not seen for 40 years now:

                                                                      Source: BCA Research

In this pricing environment, stock-pickers like us have more options for finding attractive investments. In fact since 2006 some 50% of European equity managers have outperformed their indices, which compares to 16% for US managers.

The “Old Europe” will present us with a key opportunity in the next few years, which no investor should pass up. It might even rejuvenate.

Ignacio Pedrosa is Head of Marketing & Institutional Investors at EDM Asset Management.

After such a strong rise in markets since last year’s “Whatever it takes” speech from Mario Draghi, President of the European Central Bank, many investors are asking whether European markets can make further gains. Given that wide parts of the press persist with the same old, same old ‘Europe is dead’ lament, such questions are entirely justified. There are a number of reasons why I, in fact, remain confident that patient investors will see a positive return from increasing their exposure to European equities.

Firstly, after two years of earnings declines, both “top down” and “bottom up” estimates for 2013 and 2014 are gravitating towards 6% followed by 14% growth. Both these estimates look realistic to me, even in the context of a global push to capture tax from previously hidden earnings. Hence although European markets have rerated from very low levels a year ago, earnings growth should help sustain markets from here. Viewed from a Shiller cyclically adjusted price to earnings perspective (the Shiller CAPE method), European markets are, even today, at historically low levels. From an income perspective, European equities currently have a higher yield than even Investment Grade bonds.

Secondly, there is a “weight of money” argument. While I fully accept that these can be the weakest rationale ever for buying a market, there is significant evidence that international investors are rebuilding their European allocation, precisely at the time when domestic institutional investors are also switching away from bonds, which are at present at historically high levels in portfolios as well as in terms of valuations.  Recent bond market weakness may be a further incentive for investors to accelerate this move. Furthermore, if inflation is the route that Central Banks and Finance Ministries attempt to choose in preference to deflation and long term stagnation as a way to grind down the global debt burden, then equities are a far better investment. There is a lot of evidence that a sustained period of negative interest rates is a means of grinding those debt levels down over a number of years. That also explains recent reports that Central Banks have been buying equities.

Thirdly, there has started to be a concerted attempt to move the debate in Europe on from “austerity” to “growth”. That may be easier said than done, but I suspect that the recent change in rhetoric from all European leaders is highly significant. This is not Europe backing away from the underlying principle of trying to run its economy properly, but recognition of the fact that European electorates will no longer tolerate rising unemployment, especially amongst the younger population. It is more of a case of changing the “flight path” to fiscal sustainability. The fact that Germany faces elections in a few months also fuels the rationale for more economic stimulus from Europe’s strongest economy. Global economies are starting to see growth return and it looks like Europe could be in a position to join that trend as early as next year.

Related to all these points is a more widespread recognition of the leadership position of many European companies. Global investors are realising they cannot longer afford to ignore some of the world’s leading companies listed in Europe.

Recent equity market volatility is once again a typical, utterly irrational reaction to what is, in fact, good news. Clearly the world will need to wean itself off the artificial stimulus of quantitative easing – QE –, in the same way as patient in hospital will only slowly recuperate from a major illness. The fact that the QE drugs are slowly being withdrawn is the logical consequence of a more sustainable growth in years to come.

That growth will remain low, and working off the global debt burden will be a lengthy process, preventing rapid economic growth. But that does certainly not mean it is time to run away from European equities – in fact, we do believe that it is quite the opposite: continue to add on during the inevitable corrections that are bound to occur. The press may say Europe is dead, but as an investor I can declare: Long live Europe.

Opinion article by Tim Stevenson, manager of the Henderson Horizon Pan European Equity Fund