Markets wrong to slam EU Greece response, says Ignis Global Equity Fund manager James Smith
Markets have been too quick to condemn the EU’s response to the Greece debt crisis – but their overreaction has nonetheless thrown up a number of buying opportunities, says James Smith, manager of the Ignis Global Equity Fund.
Smith, whose fund – recently renamed from Global Growth to better reflect its focus on undervalued companies – has returned 52.4% over the last year*, says markets overreacted to an official response that was, in his view, entirely adequate in the circumstances. “The EU was – and is – facing a very difficult problem and their response has been, given the situation and the lack of time to thrash out a detailed proposal, wholly reasonable,” he says.
“The EU has come in for some harsh criticism but the question is: what else could they have done? Markets are very distrustful at the moment and have sold off stocks which are, and will remain, unaffected by the Greece crisis. That presents a good buying opportunity.”
On a sector basis Smith says pharmaceutical companies, currently trading at less than 10 times prospective earnings, are attractively valued and unlikely to be hit by Greece’s budget woes. On a stock level he believes Telefonica, Deutsche Telekom, Philips and Siemens are attractively valued given their balance sheet strength and high free cash flow. In many cases he believes the weak euro, currently close to nine-month lows against the dollar, will help boost business levels.
“Europe has GDP and fiscal problems and there’s no doubt Greece has both dampened enthusiasm for European stocks and put downward pressure on the euro. But stocks look attractively priced just now and many global blue chips listed in Europe are benefitting from currency weakness in terms of exports. For that reason I’d imagine Germany is quite pleased the euro has come off slightly. Corporate profits have also done reasonably well and we may even see positive employment in some sectors in the foreseeable future.”
Smith, whose fund is overweight Europe and the UK, which he also believes is attractively valued, foresees positioning the fund more defensively in the coming months, having made strong gains through overweight positions in financials and cyclicals in 2009. He has already begun taking profits from some cyclical stocks and has reinvested the proceeds in more defensive companies including Belgian food retailer Delhaize, Casino and Walmart.
Overall his fund remains heavily underweight the US, in which he sees less value than in the UK and Europe. Pointing out that Exxon trades at 16 times earnings while BP trades on a multiple of 10, Smith says that ‘it is simply not worth overpaying for the supposed safety of the US’.
The fund retains only a small position in emerging markets – via Russian energy giants Gazprom and Lukoil – and remains underweight Japan, where Smith sees selective opportunities but only ‘lukewarm’ growth prospects. Asia Pacific is another region to which the fund has limited exposure, with Smith holding positions in Hong Kong-based Techtronic Industries and Singapore-based Keppel Corp.
“In general equities are not as cheap as they were last year, but they are not overvalued – particularly if the improvement in profits continues,” he says. “Conditions overall remain favourable for equities with stimulus packages still supporting excess liquidity. Sentiment remains upbeat and we are confident of decent gains over the coming months.”
*Source: Lipper, bid to bid, net income reinvested over one year to 29/01/10, excluding initial charge.
Past performance is not a guide to future performance and the value of units and any income from them can fall as well as rise and is not guaranteed.