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Long-term investment strategies remain sound in Europe

Despite recent volatility the fundamentals of investment in European equities haven’t changed much says Pendal Group’s Clive Beagles

  • Investors in Europe must not panic.
  • Long term fundamentals remain sound.
  • Pricing of some stocks, due to the conflict, is irrational.

Clive Beagles has a message for investors in Europe: don’t panic.

The war in Ukraine is a human tragedy and has immediate implications for many commodities, says the senior fund manager from Pendal’s UK-based J O Hambro asset manager.

But considered long-term investment strategies remain sound.

It’s a particularly pertinent message given the rotation that had been going on since the middle of last year from large, tech-focused growth companies (often on Wall Street) to value stocks.

“For many years people wanted to invest in mega caps and growth stocks and not much else,” Beagles says. “And then late last year and into this year investors got the point of thinking about something else.”

European and UK markets, particularly banks, become attractive to what Beagles describes as “slightly lower conviction” investors. They were prepared to buy into European equities, but not with gusto.

Then came Russia’s unprovoked invasion of Ukraine and those slightly-lower-conviction investors pulled back on European and UK stocks.

Broadly, the more a stock is invested in Europe — or relies on energy, or is a bank or a consumer staple relying on customers that feel the effect of higher gas prices — the more the share prices fall have been, Beagles says.

And the reaction to perceived bad news has triggered big declines.

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“Interest rates are still going up and the fundamentals of the story haven’t really changed much. Investors need to remember that,” Beagles says.

“Going back a month, the UK and Europe were much cheaper than their US counterparts in comparable sectors. And that has been accentuated in the past few weeks.

“What’s happening is a human tragedy. In economic terms, outside some commodities like wheat and wool and coal, the main impact is on business confidence. And, of course, there’s more short-term uncertainty.

“While it’s right to think that economic growth across Europe might be 100 basis points lower, the region is still expanding.”

The pricing of some equities in Europe and the UK is now verging on the absurd, Beagles says.

He uses the example of British free-to-air television network ITV. It recently reported 24 per cent growth in revenue to a record level, a 40 per cent jump in earnings per share, and said the current year has started strongly.

It’s share price dropped 27 per cent on the day of the announcement, with investors focused on the costs associated with the acceleration of ITV’s digital transformation strategy.

“Obviously investors are concerned that future economic growth and business confidence may be materially impacted by events in Ukraine. But going through the numbers the share price drop is absurd,” Beagles says.

If you look at the UK specifically the market has a relatively high weighting to oil and mining, and commodity prices are up, Beagles points out.

“Assuming we get a couple of rate rises, many companies in Europe and the UK will get back to getting a return on equity of about 10 per cent. You’d normally expect them to be trading at least at book value, and many, such as UK banks, are not. Absurd.”

A Pendal statement on Russia’s invasion of Ukraine

During these tragic times, Pendal’s sympathy lies with the people of Ukraine in their struggle to maintain their freedom.

As responsible investors, Pendal Group and its affiliates J O Hambro Capital Management, TSW and Regnan have taken decisive steps to reduce our already minimal exposure to Russian securities.

We are limiting direct risk in client portfolios and taking decisive steps to comply with evolving sanctions and restrictions. We will refrain from investing in Russian and Belarusian securities for the foreseeable future.

The situation is evolving rapidly and we continue to monitor the emerging risks, which may take an unexpected form as the consequences ripple through the financial and economic systems.

As active managers, our purpose is to navigate our clients through a world in flux to protect their interests during uncertain times.

About Clive Beagles

Clive Beagles is a senior fund manager with Pendal Group’s UK-based asset manager, J O Hambro Capital Management. Clive is one of the UK’s most highly respected equity income managers. He has 32 years of industry experience and co-manages the JOHCM UK Equity Income Fund.

About Pendal Group

Pendal is an independent, global investment management business focused on delivering superior investment returns for our clients through active management. 

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This article has been prepared by Pendal Fund Services Limited (PFSL) ABN 13 161 249 332, AFSL No 431426 and the information contained within is current as at March 16, 2022. It is not to be published, or otherwise made available to any person other than the party to whom it is provided.

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