European equity markets made progress in the second half of 2016. As with US equities, such progress came despite lacklustre earnings and persistent political noise.

By John Bennett, Director of European Equities at Henderson

Whilst not wishing to be labelled by any particular style, since September 2015 we have gradually tilted our strategy back to what people might call «value». We made a tactical move into oil stocks in the third quarter of 2015, a move that has now largely run its course.

More recently, we began increasing our exposure to European banks in the fourth quarter of 2016. Investing in the sector has been a spectacularly wrong call since 2008, but a combination of vastly improved capital ratios and a turning point in interest rate expectations have made the industry once again investable.

Banks as the Best-Performing Part of the Market

This proved to be a timely move, with European financials, specifically banks, the best-performing part of the market overall during the second half of 2016. Less positively, exposure to healthcare detracted.

The sector continues to disappoint and we made the decision to retrench into those companies discovering and launching drugs which meet unmet clinical needs as this will secure their patents, their pricing and their future.

An Out of Favour Asset Class

If we are right that the baton has been passed from «growth» to «value», it is worth considering just how extended the move into bonds and their equity proxies («quality», low-volatility stocks) has been in recent years.

The risk to our view is a relapse in bond yields, yet we find it difficult to envisage why this should happen. We are all the more encouraged that European equities are once again an out of favour asset class.

Glossary

  • Capital ratio: A measure of a bank’s financial health, used as an indicator of how well a bank is likely to withstand financial distress before it becomes insolvent.
  • Growth investing: Growth investors search for companies they believe have strong growth potential. Their earnings are expected to grow at an above-average rate compared to the rest of the market, and therefore there is an expectation that their share prices will increase in value.
  • Relapse in bond yields: A fall in bond yields, reflecting higher demand for bonds.
  • Value investing: Value investors search for companies that they believe are undervalued by the market, and therefore expect their share price to increase.
  • Value trap: An equity that appears to be cheap due to an attractive valuation (on a relative basis) may attract investors who are looking for a bargain. However, this may turn out to be a ‘trap’ if the share price does not improve or falls, which may happen if the company or its sector is in trouble, or if there is strong competition, lack of earnings growth or ineffective management.

Henderson Global Investors is the name under which Henderson Global Investors Limited (reg. no. 906355), Henderson Fund Management Limited (reg. no. 2607112), Henderson Investment Funds Limited (reg. no. 2678531), Henderson Investment Management Limited (reg. no. 1795354), AlphaGen Capital Limited (reg. no. 962757), Henderson Equity Partners Limited (reg. no.2606646), Gartmore Investment Limited (reg. no. 1508030), (each incorporated and registered in England and Wales with registered office at 201 Bishopsgate, London EC2M 3AE) are authorised and regulated by the Financial Conduct Authority to provide investment products and services. Ref: 34C