From a domestic standpoint, European growth has actually done what we broadly expected: improved, but plateaued at a fairly modest level. Earnings estimates – on average – for the market look decidedly dull (again) this year, but that is all attributable to the oil & gas and minerals industries, since the rest of the market looks to be on a fairly steady path of about 10% plus or minus versus previous earnings.
Underwhelmed by growth
The issues behind recent market falls are mainly external, with the big Volkswagen shenanigans the main domestic concern. In the US the Federal Open Market Committee decision not to increase rates due to external factors (China?) actually raised the concern that global growth is slowing. Furthermore there is growing evidence that the domestic US economy is not as robust as expected, in spite of quite strong employment numbers. Effectively, global investment and capital expenditure is simply not coming through, thus heightening the fear that the effect of QE and record low interest rates has not filtered through from Wall Street into the real economy. Is all we have seen an artificial finance-led rally?
I suspect this is not the true story, but an exaggeration from a largely political standpoint. But nevertheless, global growth is not as strong as expected or desired. This explains why reliable growth names have performed much better than the market, and also why fears have arisen that their rating is now dangerously high. This may be true in parts of the US equity market (was the fall in biotechnology stocks simply because of Hillary Clinton’s promise to tackle what she called ‘price gouging’ or because the sector was overpriced and out of touch with reality?), but it is not necessarily the case in Europe. There is a long list of names on a PEG (Price Earnings to Growth) ratio of close to 1, which in a low growth world and with reasonable visibility may be interesting.
It is also misleading to spend too much time trying to categorise growth and value, what is expensive and what is cheap. The Henderson Horizon Pan European Fund has a broad spread of holdings across many sectors and countries and categories. It is not a fund that depends on a single runner in a race – it is almost like a series of relay runners side by side. This approach has worked very well over many years – and the emphasis remains on ‘faster’ runners rather than ‘plodders’. I am not a runner, so apologies if anyone takes offence!
Clearer road ahead – but not for all
The scandal over VW might have quite widespread repercussions through the whole auto sector. While we did hold a small position in VW, we think the situation has changed dramatically for the worse. VW will undoubtedly survive, and I suspect will come out of the crisis stronger, but only when they address numerous issues including the dual voting structure and frankly arrogant approach of management towards shareholders. The cars may be good, if polluting, and have a history of reliability, but the repeated hopes of a more shareholder aware (I am not even hoping for shareholder friendly) approach have been dashed again and again, to our frustration. Getting out of the mess will erode margins as incentives return, and I suspect that the content of intelligence as well as cleanliness will take another leap forward, reinforcing our stance of good exposure to car component manufacturers.
Elsewhere, in manufacturing, the warnings have continued. Plans to cut jobs at Caterpillar and JCB show that the whole sector remains under similar pressure to the oil services industry. While there may be rallies in these stocks, the trend of low growth worldwide remains a huge headwind.
A new phase for the global economy
So is it all over? “No” is the simple and quick answer. But the markets have moved on from a global recovery phase to a global plateau phase. That may well mean greater volatility, but the underlying trend of improving earnings in Europe looks to still be in place. Valuations are much more supportive than earlier this year as well, and in just over four months we start the important dividend-paying season. Adding to holdings on bad days still sounds like the correct approach.
