Mario Draghi last week signalled that the European Central Bank (ECB) stands ready to counter the threat of weak inflation in the eurozone. A top official has also been reported as saying that new measures are currently being considered, which may include a long-term refinancing operation, or a programme of asset-backed security buying.
News flow indicates that the European Central Bank is clearly worried that deflationary pressures are building and that growth is slowing. Recent gross domestic product (GDP) figures from France and Italy were disappointing and, in the case of Italy, showed a small year-on-year contraction relative to expectations for a small expansion. If you marry this with other macroeconomic headlines, and with what the companies are telling us about growth across a range of industries in Europe, it paints a pretty disappointing picture. Our assumption had been that this would be a year of growth across the eurozone, albeit tepid in nature. With yields tumbling across the eurozone, and indeed globally, bond market investors are starting to bet on a growth disappointment and equity investors are now readjusting their expectations. This helps to explain some of the intra-sector moves in markets that have been witnessed in mid-May and especially in certain stocks.
The Henderson Global Equities Team are bottom-up stock-specific investors, trying to identify stocks that we think are 50% mis-valued as we look forward 2-3 years, so such moves can potentially create buying opportunities. Any action from the ECB may also support a rise in European equities from current levels. There are a number of stocks that we currently favour in Europe. These include Italian bank UniCredit, where self-help measures are resulting in bad debts falling and costs being lowered. The company may also potentially benefit from Prime Minister Renzi's reform agenda. We also have positions in Belgian bank KBC and Greece’s Alpha Bank. The latter is interesting because of the potential for rising margins, following the tremendous consolidation that has taken place in the Greek banking sector.
Outside of financials, we own Mediaset, which along with some cost-cutting related self-help would like be a beneficiary of any GDP recovery in the Spanish and Italian media markets. We also own Rexel, the French-listed electricals distributor. This firm would be a beneficiary of any European capital expenditure recovery, which you would think likely given the strength of corporate balance sheets and the increased tendency for this to be deployed to drive growth, as per the recent wave of announced mergers & acquisitions activity.
Matthew Beesley, Head of Global Equities at Henderson Global Investors
Please note: references to individual companies or stocks should not be construed as a recommendation to buy or sell them. These are the fund manager's views at the time of writing and may differ from those of other Henderson fund managers.