Investor pessimism exaggerated in Europe and China, say managers


Pessimism around European equities and trouble in China may be overdone, say fund managers as the earnings season wraps up.

Despite earnings growth being expected to come in at 8 to 12 per cent this year, excluding mining and oil stocks, Stuart Mitchell, manager of the SWMC European Fund, says investor scepticism surrounding European equities is the highest he has seen in his career.

“There is also a lot of negativity in expectations of European economic growth, so only the slightest uptick in growth would have an additional major positive impact on earnings on the continent,” says Mitchell.

Lloyds, Commerzbank and British Airways are “delivering strong numbers recently”, Mitchell says.

Martin Todd, manager of the Hermes Sourcecap European Alpha Fund, describes the market as being ripe for stockpickers.

“Earnings have not been reflected in sector-wide trends but have varied from company to company – for example Lloyds’ upbeat earnings saw it get back on track, while Barclays slashed its 2016 dividend,” he says.

Several fund managers pointed out that a number of consumer companies that saw negative press about activity levels in China did not see this borne out in their earnings results. Among them are LVMH, Swatch and Adidas, which all reported better than expected returns.

“We see a significant mismatch between the underlying profitability of the business models and current valuation metrics,” says Tom Stubbe Olsen, manager of the Nordea European Value Fund.

Across the Atlantic, fund managers are touting a different story on the recent earnings season. “Fundamentals currently are not looking overly solid,” says Jeff Rottinghaus, portfolio manager of the T. Rowe Price US Large Cap Equity Fund.

The fund is seeking relative safety and attractive capital returns in utilities and consumer staples as commodities “remain a tough spot”.

Earnings declines in the fourth quarter marked the first period of three consecutive declines since 2009, says Joseph Amato, president and chief investment officer for equities at Neuberger Berman, adding that markets were pricing in higher probabilities of modest Fed rate hikes for 2016.

Companies were responding to weakened sales growth levels by reducing costs and succumbing to financial engineering, adds Robin Hepworth, manager of the EdenTree Amity International Fund.

“As a result, corporate profit margins stand close to record highs, lifted predominantly by labour cost containment, lower financing costs, elevated share buyback programmes and reduced effective tax rates,” he says. “There is a risk that some of these tailwinds that have lifted corporate earnings in recent years may abate in the forthcoming years.”