Carmignac: Why Europe will disappoint ‘for years and years’

European equities have their attractions but the continent’s economic position will disappoint investors for years to come, according to Carmignac Gestion’s Frédéric Leroux.

Speaking at the fund manager’s quarterly conference in Paris, Leroux, co-manager of the £23bn Patrimoine portfolio, said expectations of a rebound in the eurozone in the second half of 2013 are likely misplaced.

Carmignac has turned more positive on European equities in recent months, upping exposure across its fund range, but Leroux said the deleveraging process will continue to weigh on regional markets.

“There is a lot of analysis saying the second half of the year will be better, and that analysis is turning into a consensus, but we do not see the momentum that would justify that,” he said.

Consensus forecasts predict less than 1% growth for the eurozone in 2013 as a whole, after a tough Q4 2012 which saw even the German economy contract at an estimated rate of 0.5%. But the group is uncertain whether last quarter represents a turning point for the region.

“There have been tremendous liquidity injections [worldwide], but deleveraging is ongoing and lending in Europe is back in negative territory. You cannot get a horse to drink if it is not thirsty,” Leroux added.

“[ECB president Mario] Draghi has to a large extent managed to normalise bond markets. But the reduction in leverage in Europe is the real drag. It will lead to disappointment after disappointment for the next few quarters and years.”

However, the group believes there is still value in European equities. Laurent Ducoin, manager of the £325m Carmignac Grande Europe fund, is anticipating further gains, despite the “first leg” of expansion having now taken place.

“The multiple expansion we have seen is not just because the markets have gone up, it is also because analysts have been cutting estimates. Quite often, that is the first leg of a proper recovery – from a market perspective, not an economic one.”

Ducoin also suggested allocations to European equities within global portfolios remain at very low levels, although he sees a number of potential headwinds for the asset class, including the elections in Italy and Germany.

Germany does not go to the polls until September, but Carmignac said the powerhouse of the European economy could come under pressure from developments elsewhere on the world stage.

Japan’s commitment to a higher rate of inflation and a weaker yen could help its exports and hinder a key driver of German growth, Ducoin added.


This article was first published on Investment Week

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