The manager says that Europe’s recession-hit southern member states are now less risky, having brushed off worries over the breakup of the eurozone and ongoing recession.The manager of the £220m Argonaut European Alpha fund told FE Trustnet that he was expecting to see strong returns in these countries, particularly in the banking sector, as improving balance sheets drive up share prices.
“Over the next couple of years there is more political risk to equity markets in the UK than in the eurozone,” he said.
“Scotland might leave the pound and the UK might leave the European community and Labour or the Liberal Democrats might win the next general election.”
“Political risk has migrated out of southern Europe and the euro into the UK and the pound.”
Performance of indices over 3yrs
Source: FE Analytics
According to data from FE Analytics, European equities have returned less than UK equities over three years: 22.37 per cent compared with 27.01 per cent.
European equities have been catching up in the last two years, however, with the MSCI Europe ex UK index outperforming the FTSE 100 in both 2013 and 2012. In 2012 it returned 15.95 per cent compared with 9.97 per cent from the FTSE 100.
In 2013 it returned an average of 25.28 per cent compared with 18.66 per cent from the FTSE 100.
Norris has recently increased the fund's exposure to southern Europe, particularly its banking sector which he sees as good value and due an increase in earnings growth.
The manager has been buying into Greece in particular in recent months and is 8.7 per cent overweight the country. He is 10.3 per cent overweight Ireland and 8.6 per cent overweight Italy as well.
“European equities are actually going to deliver world-beating returns over the next few years and within that banks in southern Europe will outperform the market even more,” Norris said.
The manager is 10.8 per cent overweight financials in the fund.
“For the last six years they have been the pariah asset class, the most unpopular in the world because they've been the most geared towards European economic growth and the risk of Europe breaking up.”
“Attitudes to European equities have been in the reverse of a bubble, but many things have since improved, particularly over the last 18 months.”
Norris argues that this trajectory will continue, as he believes share prices are primarily moved by earnings revisions.
“Neither growth nor value drives share prices, corporate profits do. And while European equity markets are not as cheap as they were two years ago, the key difference is that profits are growing.”
“Identifying earnings surprises is what's going to make you money from here on in, just looking at static valuations will not.”
FE Analytics data shows Norris’s Argonaut European Alpha fund has returned 25.06 per cent to investors over three years compared with a sector average of 13.87 per cent.
Performance of fund vs sector and index over 3yrs
Source: FE Analytics
“Southern European economies have become competitive again and earnings surprises are going to come through from domestically focused stocks and that's the opportunity,” Norris said.
“The chances of the euro breaking up have now diminished to an almost infinitesimal degree, if the southern European economies were ever going to leave the euro in this lifetime, they would already have done so when their economies were in a deep recession.”
“They have now achieved competitiveness through painful internal devaluation and deflation and the fact that wages are less in southern Europe.”
“Why would they now leave the euro and get an external devaluation on top of that? It's not necessary.”
Norris’s optimism on the euro is not shared by all market commentators, some of whom warn that a break-up could come back on to the agenda as France’s economy diverges from Germany’s.
He expects this improvement in competitiveness to drive a period of generally buoyant European stocks but with a stark geographical divide pitting north against south.
“Eighteen months ago we had nothing in southern Europe and had 35 per cent of the portfolio in Germany and another 25 per cent in Switzerland; now those two countries are 12 per cent of our portfolio and southern Europe is 35 per cent of our portfolio.”
“If you were going to build a car plant five years ago, you'd have built it in Germany; today you would build that in Spain because Spanish labour is competitive again.”
“That's why you're going to be in for a period of multi-year outperformance of southern Europe versus northern Europe.”
Norris’s fund is on the FE Select 100 list of top funds.
FE's analysts say that the manager’s use of market sentiment indicators to help build his portfolio is a differentiating factor.
The manager’s bullish stance on Europe has to be borne in mind, the analysts say, and if bad news appears on the continent, the portfolio could be hit by price swings.
