Uwe Zoellner, the head of pan-European equities at Franklin Templeton Investments, talks about opportunities investing in European equities.
What is the asset class and geography you are focused on?
I currently manage European equities but previously I ran US equity funds and global funds as well. Managing European equity is an exciting job at the moment – after some difficult years, the region is turning around and there are interesting investment opportunities coming up.
What is your outlook for the coming months? What should investors look for?
By now the consensus has taken on board that structural change is happening in peripheral Europe and that the combination of austerity and deregulation over the last few years has started to deliver benefits to countries such as Spain and Portugal. People also see that Italy is moving towards a more reform-minded course of action. But at the same time, we see more concerns about the economic growth outlook. One issue of debate has been the sharp decrease in inflation and the worry of a possible risk of a Japan-style period of deflation. The ECB, however, has been sending strong signals that they will take any effort to avoid such a scenario. In the United Kingdom, on the other hand, people worry about an increase in interest rates as a result of the improved economic outlook. The result of those investor fears was not a drop in the overall market but instead a rotation out of cyclical stocks and in the UK also out of interest-sensitive stocks to the benefit of more defensive names. In general, the mood is a bit more cautious after a long period of stronger European equity markets and investors seem to look for new guidance and further market direction.
We are still positive for the outlook of European markets. After the strong run, I would not be surprised if markets take a breather and the concerns about the economic cycle might be a catalyst for such a profit-taking. But we would see any setback as a buying opportunity. We never expected a quick spectacular turnaround of the European periphery but see the current signs of stabilisation combined with the outlook for modest growth next year as the starting point of a sustainable path of recovery and see no reason to change that point of view.
What are the main risks, either upside or downside, to the outlook?
I think the main risk to the positive outlook for European equities would be if the economic recovery in the United States does not come through as we need better global growth to support the recovering European economies. I think people have low expectations on China; so if anything, I would expect positive surprises from that part of the world. I don’t think any of the current geopolitical problems will have a long-term impact on global economies.
What was the best investment you were ever involved in?
Dialog Semiconductor: This German company had been a popular hype-stock around the year 2000, followed by a period of disappointment for many years to come and then suddenly the company turned the corner and became a leader in power management chips and the supplier of those chips for Apple. Due to the difficult history, investors did not pick up on the change initially and we got into the stock at €4 and exited less than a year later at €16.
What was the worst?
Probably Homeserve. The company had a very interesting business model offering maintenance for private households to take care of their appliances and heating systems – basically insurance combined with full technical service. Unfortunately, the company came under investigation for alleged mis-selling of their services and the stock dropped heavily. Given that it was impossible for us to forecast the outcome of a regulatory review and any possible fines or constraints to the business, we decided to sell out at a significant loss.
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