Husselbee is also invested in a small- cap offering, the Barings European Select fund run by Nick Williams. “Small caps remain an attractive area of growth in Europe,” he says. “Of the four funds we are invested in, the tilt is currently towards growth and small caps, both on an unhedged basis.”
Value play
Indeed, much of the story in Europe in 2015 was growth companies outperforming value. Rory Bateman, head of UK and European equities at Schroders, notes that value has now underperformed growth for the longest period on record, and that valuation levels between the two different style groups have also diverged significantly.
Given many of the so-called value stocks were in the oil and mining space, Husselbee is not surprised many of the value sectors have become cheap. But while he believes many fell for good reasons, there are still a number of sectors that seem good value for a contrarian investor. Asks Hughes: “Is there a chance we will see some mean reversion this year?”
“Maybe, given how much the market has moved, meaning the gap between value and growth has become very extreme. However, companies in the value space need a catalyst for change, so it will be very much about picking them on a selective basis rather than seeing a wholesale swing to value.”
A domestic story
Stuart Mitchell, founder of SW Mitchell Capital and manager of the SWMC European fund, says that against a backdrop of uncertainty regarding the economic outlook for the emerging world, he continues to find his best investment opportunities in the more domestically orientated areas of the European markets. “From the perspective of a stockpicker, we have been surprised by the severity of the recent market downturn,” he says. “Almost without exception, the companies we hold in our portfolio continue to develop as we had anticipated a year ago.
“At the same time, most of the macroeconomic data supports the view that the European economy continues to gently recover.”
Tenerelli supports the case for domestic European stocks. He says that while earnings forecasts are continuing to be reduced, much of the domestic European economy continues to perform resiliently across both industrial and consumer sectors.
“Market valuations are discounting a lacklustre earnings outlook and do not reflect the potential scope for recovery,” he says.
So what are the headwinds investors should be watching out for? “Everyone seems worried that a lower oil price is deflationary and that we are heading for a global recession,” says Husselbee. “However, I would argue that a lower oil price will put money into the pockets of the western consumer, who will buy more goods from Europe.”
Tenerelli concurs. He says many companies are being negatively impacted by the collapse in the oil price and other commodities; with integrated oil companies, metal and mining entities already facing pressures on their profitability.