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Focus on the Strongest Banks in Europe, says SWMC

Trying to predict what the European Central Bank will do is impossible says Stuart Mitchell - so focus on companies instead. The Europe recovery looks strong if you look at the micro

Emma Wall 26 February, 2016 | 9:56AM


Emma Wall: Hello and welcome to the Morningstar Series 'Why Should I Invest With You?' I'm Emma Wall and I'm joined today by Stuart Mitchell, Manager of the SWMC European Fund.

Hi Stuart.

Stuart Mitchell: Good morning.

Wall: So Europe there's a lot going on in the headlines. Which I think is concerning investor somewhat, because we were told that Europe was on the recovery. Europe was a great place to be after sort of the U.K. and the U.S. had done their recovering.

I suppose we better start with the first negative influence and that is negative rates. Japan has gone into negative territory and it sort of opens the door for Europe. As a European equities investor are you able to work around things like negative rates.

Mitchell: It's very confused picture. As a stock picker, out on the road visiting companies the recovery appears to be very much on track. And if we were to look at our universe of companies we're invested in and think of the forecast we made for earnings a year ago and look at where they are now. They pretty much achieved everything we would have hoped for.

And the challenges of course there is a view that with the U.S. beginning to slowdown and with problems in China that could some say, derail the rather fragile recovery in Europe. So I guess negative rates is a possibility, it's another way of boosting, trying to prolong their recovery in Europe. But our view is that, there is enough recovery, there is enough growth that won't be needed in the next few months.

Wall: So actually it could if anything be a positive story for European markets.

Mitchell: It's a very, again incredibly complex but at the end day we'll probably force banks to lend a little bit more and although lending growth is beginning to pick up really quite nicely across Eurozone anyway. But it might just be extra boost because of course it will cost them to leave money with the ECB. So it will make sense for them to try and find people to lend to.

Wall: Now, you've mentioned banks there. And that’s the other big story about Europe at the moment there has been some concerns about the European banks and that's actually, contagion has pulled down European stock markets in general. Which of course could be a buying opportunity, do you have exposure to European financials?

Mitchell: We do and we think there are great opportunities. We've done it slightly unusual way we've just focused on the largest and the strongest banks in Europe. We don't really like investment banking, but we like companies like Lloyd's that have dominant market shares and they are able to choose who they lend to and have a great source of cheap funding.

So it's been quite nerve-racking past few weeks as you can imagine. I mean our holdings have been hit much less than the wide financial sector because they are the strongest. But I think the view or the bear view which has taken hold is runs along the lines, again weakness in China and America knocking on to Europe and nonperforming loans beginning to pick up again and a particular anxiety around the oil and gas area. And there is kind of rather frantic focus on which banks have the largest exposure to the oil and gas sectors of the economy.

But our view – looking at the micro sector, I mean lending growth is picking up very nicely, net interest margins, despite rates been low, are staying about flat; non-performing loans are falling; there is lot of cost cutting.

So we think there are – we still think they are very, very good opportunity. I mean, it is been quite comforting that in the last week or so in O'Reilly the banks have come back very, very strongly but we think there is still – really have very, very exciting opportunity, but you have believe that European economy will continue to recover for that to be so.

Wall: And I suppose as a European equity fund manager seeing these drops in the market is not necessarily a bad thing for you from your point of view because if you are bullish on the outlook for these stocks as a whole it is an opportunity to add?

Mitchell: It is. Although we are always – we try to kind of listen – the market kind of give you all sorts of very interesting clues about where the economy is going. And it is always a little bit nerve-racking when you see such a collapse particularly in one sector and it makes you wonder have we got this wrong, have we not understood this properly.

And every month we speak to all of our companies and we – as far as we can see the recovery is proceeding pretty much as we would have expected.

So I would say you are absolutely right, it is an opportunity for us to recheck the portfolio little bit to put some money back into some things which have fallen a lot, and take some money out of some of the better performing stocks. But again it all happen so quick and if you look the last few days, we are already almost flat for this month. So there wasn't really time to do that.

Wall: It's a time to focus on fundamentals?

Mitchell: Very, very much so. But again that's I guess they are kind of the strength and weakness of strategy like ours, all our work is stock picking, stock picking, stock picking. So maybe like all of us we are missing something so big we can't see it around the kind of the debt cycle and what's happening in China. But if you look at the focus in micro on Europe the outlook to us too looks very strong.

Wall: Stuart, thank you very much.

Mitchell: Thank you.

Wall: This is Emma Wall for Morningstar. Thank you for watching. 

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About Author Emma Wall

Emma Wall  is Editor for