Henderson Global Investors director of European equities John Bennett has been selling down his position in European banks following concerns over return on equity and earnings growth in the sector while also arguing that the opportunity to allocate to stocks in Europe’s peripheral economies is “over.”
The manager of the £279m Henderson European Focus and co-manager of the £1.8bn Henderson European Selected Opportunities funds began selling positions in European banks back in Spring this year after a relatively short holding period of around 18 months, based on Bennett’s belief that banks are only for “renting” over the short-term.
“Bank stocks are not for investing they are for renting. Handle with care but don’t buy and hold,” he says.
Bennett bought into the sector back in 2012 when the euro crisis created “distressed prices”. Since then bank stocks have re-rated significantly, according to Bennett, but concerns over the return on equity and earnings growth available against the current bleak economic backdrop has prompted the manager to move away from the space.
He says: “We started to sell the banks in the Spring of this year and the reason for that was they have re-rated from distressed valuations in 2012 when you had the existential crisis of the euro, which incidentally I don’t think has gone away it’s just in abeyance, you did get very very low price to book for bank stocks and there was a trading opportunity which for us lasted anywhere between 12-18 months.
“For us that is over. They have re-rated to an extent which I believe factors in a healthy return on equity and I don’t think the whole sector is going to generate a healthy return on equity. And it also factors in earnings growth and I don’t see earnings growth from 90 per cent plus of European banks. At this stage I do not see a return to earnings growth because I cannot see the demand for loans in what is a recessionary double dip or triple dip continental Europe.”
Bennett also opted to “cut and run” from what turned out to be a very short-term investment in Greek banks. He adds: “We had a one night stand in investment terms with Greek banks that lasted a few months only and we cut and run because I didn’t like the behaviour of some of the management, quite frankly, when I met them.”
The European equities team have opted to stay in “some select names”, adds Bennett, including Spain’s Bankinter and Nordea Bank, which is a top 10 position in the European Focus fund.
The example of Greek banks is also an example of stocks within peripheral Europe where Bennett has “cherry picked” but has now also opted to shift out of during the second quarter of 2014 as peripheral yields compressed.
“I didn’t like the extent of the compression of sovereign yields, and this is an important point, in Southern Europe. So you have a dash for yield which I think usually ends badly and you saw a great compression of sovereign bonds in the periphery with Spanish yields lower than US treasuries,” he says.
“So we actually reversed from the periphery at the time we were selling bank stocks in the second quarter of 2014. That being said we have stayed in some select names. I still own Bankinter which I see as a challenger bank in Spain, it is extremely well managed. But I think the time for ’let’s asset allocate to the periphery’ is over.”