European equities set for 2012 comeback
Although investors and markets have spurned European equities over the course of 2012, Morgan Stanley Investment Management’s (MSIM) Matthew Leeman believes the end is in sight for heavy redemptions and weak returns from equity funds.
“European equities could make a comeback in 2012,” declared Leeman, managing director of MSIM’s European equity team. This is because the market is trading at roughly a 30% discount to its long term average valuation, he said.
European equity prices have suffered this year, particularly as uncertainty about the future of the eurozone has not subsided. The Stoxx 600 has dropped 12.04% so far this year. Similarly the MSCI Europe index has fallen by 12.23%.
“There is no silver bullet” to remedy market uncertainty, Leeman said, explaining that “investors require a degree of visibility over the framework or path the eurozone is going to follow over the next few years.”
“Nothing can be solved overnight, but if markets are provided with a framework they can deal with, equity markets, in particular in Europe, could rise quite strongly,” he said.
Although Leeman’s team follow a bottom up stock picking approach, he said keeping an eye on the macro environment has never been more important. When considering stocks Leeman explained that the team’s starting point is always the company itself, but “we don’t operate in a vacuum”.
“When modelling a company we have to incorporate some of the macro factors such as growth and inflation rates. Banks are not trading on fundamentals at the moment – it’s all about the news or lack of it coming out of EU institutions,” he noted.
Equities that might do well next year are those with strong brands, sustainable returns and the potential to grow, “not those whose key products could suddenly be made obsolete by competition around the world,” he said.
Despite the volatility in 2011 in European equity markets, Leeman’s investors have stuck with him as “fortunately they take a long term view like ourselves,” he said.
MSIM’s European equity team has seen positive inflows over 2011 irrespective of “European equities not being the flavour of the month, or year,” he said.
Leeman was a director at Societe Generale Asset Management where he managed pan-European, Europe ex-UK and eurozone equity strategies. He was previously a partner at Mont Blanc, a European hedge fund.