Annual Report 2017

Investment Strategies

Regional Equity Strategies

European Equities

Political risk was at the forefront of investors’ minds after the shock Brexit vote in June 2016 and President Trump’s widely unexpected victory in November. However, the reality proved to be more benign, with the stock market's preferred political candidates carrying the day in a raft of closely-watched elections and political challenges being mostly overcome, assuaging worries over the possible break up of Europe.

In March, Dutch Prime Minster Mark Rutte’s Liberal party succeeded in the country's general election, heading off the challenge from Geert Wilders' anti-EU, anti-immigration Freedom party. Later, in France, Emmanuel Macron became the new president, defeating anti-EU Marine Le Pen by a larger margin than expected, while his newly-formed party, En Marche!, subsequently obtained an absolute majority in the French parliamentary elections.

Attention then switched to the German general election in late September 2017. This passed off as expected, with Chancellor Merkel returned to power after the CDU/CSU secured the largest share of the vote. However, at 33 percent it was their lowest showing since 1953 and necessitates the formation of the so-called Jamaica coalition with the Green Party and FDP. The anti-immigration, anti-EU AfD party came third with 13 percent of the vote. At the margin, this is seen as taming Chancellor Merkel’s well-articulated pro-European stance given greater divergences at home.

The sole political setback was the Italian referendum on constitutional reform in December. However, as previously seen in 2016, the negative result was taken surprisingly well by the markets.

Adding to the positive mood in Europe over the 12-month period was clear evidence of the continent's improving economic performance, reflected in solid growth numbers, a buoyant consumer and an improving employment picture.

Given increased economic momentum, the question now arises as to how the European Central Bank (ECB) will ease back on the monetary throttle. Some indications came in September when President Draghi essentially confirmed the likelihood of an October decision to implement further tapering in the ECB's quantitative easing programme.

In strong-performing European equity markets, our Continental European (CEU) and sister strategies of European Select Values (ESV) and European Concentrated Value (a more recently-launched large cap, concentrated version of ESV) finished behind their respective benchmarks.

Good stock picking in ESV, particularly within healthcare, was cancelled out by the strategy's structural lack of exposure to the top-performing financials sector, as well as holding defensive put options. In markets that are again hovering around all-time highs, we believe it is more important than ever to be valuation-disciplined, especially since improving economic conditions and ultra-loose monetary policies will not co-exist forever. Meanwhile, our existing investments within the ESV strategy offer significant aggregate upside potential, which helps us to be patient and opportunistic.

CEU was also hindered by an underweight financials stance earlier in the period plus holding a small amount of cash. Stock picking was also a minor headwind, with constructive selection in financials and industrials undone by weakness in our consumer discretionary and materials names.

Over the past few months, we have increased European domestic exposure within the CEU strategy, in particular European banks, whilst being underweight healthcare and consumer staples. We believe there is far more valuation and earnings support for the more reflationary sectors given the macro backdrop.

Europe continues to normalise in terms of politics, growth and profit-cycle recovery. Our European equity strategies are well placed to capitalise upon the expected continuation of these positive trends.