Will Catalan Controversy Derail Europe Recovery?

Threadneedle European Select fund manager Mark Nichols says that political uncertainty is nothing new but the Catalan independence vote does impact markets

Emma Wall 5 October, 2017 | 10:34AM
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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 Mark Nichols, Manager of the Threadneedle European Select Fund.

Hello, Mark.

Mark Nichols: Hi, Emma.

Wall: So, if we cast our minds back to the beginning of this year, post the Macron win in France, there was a real positive feeling about the European macro and political outlook. Fast forward to the beginning of October where are now, and there certainly has seemed to be – there seems to be a bit more unrest. We have had the Catalan highly-contested vote in recent weeks and indeed the German elections, which wasn't a clean sweep perhaps that Merkel was hoping it would be. How much of a concern for you as an European equities fund manager is this sort of political uncertainty?

Nichols: Yes. Well, we shared some of the fears around the French presidential election. It felt quite a binary event and it's (caused) question marks about the structure of the European Union, the integrity of the currency behind that, the euro itself being questioned. And coming out of that we shared that sense of relief, that sense that Macron could actually move Europe forward, could get the French economy going in the right direction, and there are some signs that he is making progress on that front. We've never felt that the German election would be such a big event, almost certain to be a coalition and almost certain to result in a pro-EU coalition and that is what we have got. So, rise of the Far Right, yes, but their impact on policymaking in Germany, we think, will be pretty modest. In fact, is likely to be completely negligible given all the other major parties have said they won't work with them.

The Catalan situation is obviously very recent. It's clearly raising questions that a lot of people haven't thought about. We tend to bear in mind that as European investors we have dealt with uncertainty, particularly political uncertainty, for quite a long time now. It's not a new development given what happened in France, what's happened in the U.K. with Brexit. Remember that Italy has had countless governments since the Second World War and we have another Italian election coming next year. Italy has got an anti-EU party that's prominent. So, there will be question marks going into 2018. But it's also clear to us that there are certain assets that are very high-risk even as investors build the prices up. And in particular, things like Spanish banks, they are very domestic and they are very tied to the Spanish economy and the Spanish situation and the integrity of Spain is being questioned in a way that a lot of people haven't anticipated and the risk inherent in those assets is being reflected in materially weaker share prices as a response to that.

Wall: Is it then as simple as just saying, right, let's avoid the domestically-sensitive stocks within Europe and simply stick to those companies which may be listed in Europe but they are very much a global in outlook, global in revenues?

Nichols: Yeah. So, we have two very simple principles. One is, we always put risk first. As long as we understand how we might lose investors' money, we can protect against those major risks and we can identify assets that have the ability to grow in the future and deliver positive return. There are lots of sporting analogies. Tennis is great. Roger Federer occasionally hits fantastic winning shots in tennis matches, but he almost always has fewer unforced errors than the next guy. It's the idea of defensive investing. If you don't lose money, you at least have the chance to make money going forwards.

And the second thing is, we look for businesses that work outside their own domestic borders. If you have a product or a service that really adds value to your customer or changes their lifestyle or is habit-forming for them, then that product or service really proves itself when it can go and work in other markets that maybe have a different culture or a different history of interacting with that good or that service. And therefore, one of the characteristics we tend to have as investors is a big exposure to foreign sales and non-European or non-domestic markets. So, for us, a lot of these events while relevant, sometimes take a backstage to what's actually going on fundamentally in each of the companies that we are analysing.

Wall: Mark, thank you very much.

Nichols: Thank you.

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

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Emma Wall  is former Senior International Editor for Morningstar