European Stocks Will Outperform S&P 500 in 2017

European and Japanese stock markets will outperform S&P 500 in 2017 - and it is due to the resurgence of value stocks, says Henderson's John Bennett

Karen Kwok 23 February, 2017 | 10:09AM
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Value stocks will continue to outperform growth stocks through 2017, according to John Bennett, head of Europe equities for Henderson. The trend, which began in September last year, has seen value stocks – much unloved for the past few years – rally considerably. But Bennett says this is just the beginning.

“European and Japanese stock markets will outperform the S&P 500 in 2017 as the value market in the world is mainly Europe and Japan rather than S&P 500. However a lot of things have to not go wrong for that to hold,” said Bennett.

Bennett started shifting his fund, the Silver Rated Henderson European Focus Trust (HEFT), into value stocks from growth companies starting last February, and began trading more aggressively in the second half of the year. This is because he believes high quality growth stocks become expensive as they are “scarce, and overbought” in Europe.

“You have a one-way street in favour of growth, low volatility and high quality companies. We bought value because we think the air was getting thin,” Bennett said.

Bennett explained that in recent years investors had gravitated toward high quality, low growth “bond proxy” stocks which are not representative of the real opportunities European stock market. He believed it is now time for investors to own European assets they are less comfortable with.

And he said despite the recent rally, it was not for UK investors to buy value stocks in Europe, as their US counterparts had not yet piled in.

“Europe last year fell out of favour, in fact Europe always gets into favour very late, and I think it’s going to happen this year. But it won’t happen until Europe rallies a further 10% that US investors will start buying it, as they usually buy in late,” said Bennett.

S&P 500 index is up 4.8% year to date while Euronext 100 rises 1.1% year to date.

Buy Banks: They Still Look Cheap

Bennett himself owns stocks he feels “less comfortable with”: banks. The fund manager, who admitted he and many of his peers felt banks are “the most difficult thing to own in Europe”, bought European banks in the second half of 2016, and in particular likes Nordic banks.

He explained that was because Nordic banks became better businesses after they learned their lessons from “the madness of empire building during their crisis in 90s”. Nordic banks have consolidated since then, leading them to become domestic and oligopoly businesses, which Bennett says they should stay.

“Look at Svenska Handelsbanken (SGBA), the gold standard for European banks. They are opening branches one at a time in the UK and the Netherlands. If you have targeted organic growth it works,” said Bennett.

Stephen Ellis, director of financial services equity research agreed it was a quality stock, saying that this Nordic bank Handelsbanken's emphasis on decision-making at the local branch level gives it the flexibility to win new customers and provide excellent service to its current ones, in effect raising switching costs.

The Euro Stoxx bank index has risen 30% since the start of August; however Bennett believes they still look cheap relative to history.

“Many of them are no higher than one year ago – and of course well below the pre-crisis highs of a decade ago,” said Bennett.

He added that interest rates do not need to go up for banks to be profitable, although he concedes that it will be difficult it rates fall further.

Risks Ahead: Italy and Negative Rates

Interest rates in Europe have bottomed out according to Bennett, as inflation expectations have risen.

“Positive fiscal policy is returning to Europe. In the UK as you have seen Theresa May abandone George Osborne’s austerity measures and giving Northern Powerhouse a chance. Germany’s purchasing managers’ index is quite strong as well,” said Bennett.

The latest data from Eurostat showed that none of the Eurozone’s 19 member countries was in deflation in January, the first time in four years. The Eurozone consumer price index measure of inflation is 1.8% higher in January, a jump from the 1.1% inflation rate recorded in December.

Bennett worries about Europe returning to negative rates, saying: “I do not understand how it can be right that Germany has 1.9% inflation level while having a bond yielding at 0.46%.”

Italy is also one of Bennett’s concerns, as he believes the country has bad debts and weak banks, which could eventually lead to collapse of the economy and a potential exit from the euro. However, he does believe that a Marine Le Pen will claim victory in France’s presidential elections this year.

“Despite these concerns I am sure Europe is going to have a strong year, both economically and in stock market,” said Bennett. 

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Rating
Henderson European Focus Trust Ord1,490.00 GBX-4.18Rating
Svenska Handelsbanken A99.08 SEK-0.84Rating

About Author

Karen Kwok

Karen Kwok  is a Reporter for Morningstar.co.uk