A combination of very low valuations, positive rhetoric from the ECB and a general uptick in the global economy has meant investors in European equities have been well rewarded recently. Our data shows the MSCI Europe ex UK index has returned 28.54 per cent over one year.
Performance of indices over 1yr
Source: FE Analytics
However Wild, who runs the £890m JOHCM Continental European fund, warns investors not to get carried away.
The manager says that although the European market is becoming more resilient, the current rally needs stronger earnings growth to come through to support the now relatively high equity valuations.
“The European market has been purely re-rating, so the question is 'is the rally over?' I think it will pause and a modicum of patience may be required over the next few months,” he said.
Wild adds that the reason this patience will be needed is because the market re-rating is largely complete, which is evident in the way P/E ratios are nearing their historic averages. However, he says this is nothing that long-term European equity investors should be concerned about.
“I am a believer that the European macro picture will improve,” he said.
“Earnings are currently 35 per cent lower than they were in 2008. Some of those earnings won’t be coming back in a hurry and some will be lost forever after the crash. However, the point is that the earnings base is very low.”
“On top of that, earnings momentum is starting to turn positive. The question is, is the macro strong enough to grow earnings further from here?”
Some commentators have recently told FE Trustnet that they fear a re-emergence of the eurozone crisis next year.
Wild is much more positive. He says that although the European macro-revival is still in its infancy, he expects double-digit earnings growth in 2014 as the political situation improves.
“Politics has been a perpetual concern in Europe and we have gone through some real risky times, even over the last 18 months. However, over that time equities have still gone up 40 per cent,” he said.
“Europe has become more resilient. One of the reasons for that is because of a change in tune from the ECB. Political crises, such as the Italian election, reshuffling in Greece and Portugal, along with the Cypriot bailout, have not led to implosion.”
“Also, austerity has been harsh but has been accepted. The process is not over, but now it is closer to the end. The fiscal drag is forecasted to be 90 basis points of GDP in 2013, falling to 30 basis points in 2014,” he added.
The manager says he looks closely at PMIs and says they herald a change in fortune. He adds that increased confidence has meant businesses are now willing to spend and easing credit conditions mean they can afford to as well.
Despite his optimism on the corporate economy, he says consumers are still not really taking part in the economic recovery.
Wild points out that consumer spending in the eurozone still remains a lot lower than it was before the crash, but says this will change over time.
“Can consumer spending get much worse from here? I doubt it. One of the major positives is that we are seeing, as of last week, a trough in new car registrations,” he added.
Wild has managed the JOCHM Continental European fund since March 2008.
According to FE Analytics, over that time it is a top-quartile performer in the IMA Europe ex UK sector with returns of 52.16 per cent, nearly double the returns of its MSCI Europe ex UK benchmark.
Performance of fund vs sector and index since Mar 2008
Source: FE Analytics
JOCHM Continental European also boasts top-quartile returns over one, three and five years.
The portfolio is made up 67 holdings. Wild’s largest country weightings are to Germany, France and the Netherlands.
The manager says his fund has a clear bias towards domestically oriented stocks over companies that derive their earnings from around the world. He says he is avoiding emerging market plays in particular, something he expects to do for at least another six to nine months.
“A business like Unilever is not a poor stock; it is a really great company. However, the problem is that it is seeing slower earnings at the moment,” Wild said.
The manager’s largest overweights are to the likes of banks, industrials, selective materials, technology and consumer stocks.
His biggest active bet, for instance, is financial Societe Generale. It makes up 3.2 per cent of his fund.
The JOHCM Continental European fund requires a minimum investment of £1,000 and has a total expense ratio (TER) of 1.37 per cent.
However, like other funds at the group, Wild’s portfolio has a performance fee of 15 per cent if it beats its benchmark.
