While some believe that Europe has had its moment in the sun, others might be attracted to the market for its increasingly cheap valuations.
In fact, European equities haven’t been this cheap for over a decade, as Zenah Shuhaiber, co-manager of the JPMorgan European Growth and Income trust, told Trustnet.
Her £372.7m trust was recently redesigned with a more simplified structure. Previously investors had the option of switching between income and growth, but now it is a combined share class.
Alan Ray, an analyst at Kepler said: “The new structure frees the management team to concentrate on stock selection without having to worry about the timing of underlying dividends.”
While it might still be early days, he praised the portfolio for being “very well set to benefit” from its defensive positioning going forward and noted that “stock selection has added value against the benchmark even in the midst of a very difficult equity market” over the first half of the year.
Below, Shuhaiber discusses why negative macro headlines for Europe don’t undermine her confidence in the asset class, why her team is starting to increase exposure to cyclical stocks, and where she sees opportunities going forward.
Performance of trust against sector and index since merger of share classes
Source: FE Analytics
Can you describe the trust’s philosophy and process?
We are bottom-up stock pickers and for each candidate stock we ask ourselves four questions: is it a good business; is it attractively valued; is there an operational momentum; and is the business sustainable?
But it’s not just about the individual stocks that we own, we're always thinking about portfolio construction as well, as we're trying to deliver a portfolio that's diversified by both stock and style and can outperform in very different market environments.
Finally, we've just employed an enhanced dividend yield framework, which allows us to not necessarily be looking for income stocks, but rather for what makes the most attractive securities for our portfolio, and then pay 4% per annum out of the trust.
Why should investors pick your trust?
The trust gives you access to some of the best European companies through a very long-standing process that has outperformed across multiple market environments.
In the past 10 years, we've outperformed 70% in value environments and 70% in growth environments. Today, many people are concerned about whether it's a value market or a growth market, but with us, it doesn't matter, as history tells us that we outperform in both.
Also, income is still very important for investors, and that's something that we're able to provide.
Where do you see value currently?
We are currently defensively positioned, as we saw more earnings resiliency in defensive companies and sectors. For instance, healthcare. A few years ago, a lot of people seem to have forgotten about pharma companies and thought that their pipelines were going to shrink forever.
We also maintain an overweight and energy stocks, as that they continue to look very attractively valued, due to cuts in capital expenditure causing excess supply/demand constraints in the oil space.
However, we are also starting to think about adding back some cyclicality elements and reducing defensives, especially the ones that have become expensive.
We think of banks as very cheap, for example. Some of that would be coming from forex, but some is also from pricing power. The industrial sector has also proven resilient.
What were the best and worst contributors to performance over the past year?
Equinor was one of our best stocks, which has gone up 74% since we started to add to some of the energy segments in the third quarter of 2021. The company focuses on natural gas and generated so much cash this year that it has been able to increase buyback levels and set aside some extra money for the capital expenditure needed to fund renewable projects.
Performance of Equinor year to date
Source: Google Finance
Losing 18%, ASML is among our worst performers. The business is involved in manufacturing equipment for the semiconductor segment. In hindsight, valuations had got excessive last year, so the stock derated. There was also a cyclicality element and a macro slowdown that affected some of the earnings potential in the short term.
That said, the rising intensity and complexity of semiconductors that are required in a lot of the technology we use make the company unique in their position within the supply chain.
What are Europe’s perspectives in relation to a possible recession?
We think of macro perspectives in terms of risk. At the moment, we're running a slightly lower portfolio risk than we normally would because of all of the unknowns, so we have just under 10% in off-benchmark stocks, or active shares at around 40%.
That said, the European equity market does look exceptionally cheap, at around 30% discount to the US, which is the cheapest in over a decade. This gives us confidence in the asset class, even if I don't expect headlines to necessarily get any better, especially in the first half of the year.
In fact, it's probably going to look a bit worse in terms of the PMIs [Purchasing Managers' Index] that have already hit Europe and the consumer confidence numbers that have come out.
But the market tends to move ahead of that. While all those figures were getting worse, the market has had strong bounces, with a recent rally up to 17%.
So we need to be mindful not to think that we can time the market and just stay invested, as opposed to thinking about whether we are at the bottom or even to having a price target of where the market is going.
Performance of ASML year to date
Source: Google Finance
How do you use gearing?
If we have a long-term positive view of the market, then we want to be positively geared structurally. We look at it from a portfolio perspective: we are managing a core portfolio that’s risk-controlled, and we don't want gearing to swamp returns, in particular, in markets like we've had in the past year. So we will most likely be geared around mid-single digit level on a permanent basis and then fluctuate between that, just driven by individual stock selection calls.
What do you do outside of fund management?
I cannot do without my Reformer Pilates and my spin classes, and I spend a lot of time looking for healthy but time-efficient recipes.