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THE INVESTOR
THE INVESTOR CENTRE
I
n the short term we believe that stock
markets will face a tug-of-war between
equity-friendly developments (such as
strong UK economic data and merger &
acquisition activity) and concerns that
some of the European economies could be
‘turning Japanese’ – that is, heading for
de ation. Our own view is that Europe will
escape outright de ation, but the recent
policy measures announced by the European
Central Bank (including negative deposit
rates) show that policymakers are taking the
threat seriously. In the global equity income
component of the portfolio, our preference
remains for companies with the ability to
deliver decent rates of earnings growth, but
which can also pay attractive dividends, as
we rmly believe that income is likely to be
an important component of total returns
in a low-growth world.The recent rally in
bond proxies has worked against us, but we
expect this trend to unwind over the coming
quarters as investors get greater clarity on
the health of corporate pro ts. Moreover,
income strategies generally should
continue to be supported by the ongoing
hunt for yield. In the UK equity growth &
income component of the portfolio, we
will maintain our contrarian approach,
looking for unloved stocks that the market
has chosen to shun.We particularly target
UK companies where pro ts have fallen
below the historic average but where the
core franchise and medium- to long-term
potential remains attractive.
W
e remain very optimistic on the
outlook for European equities.
The case for Europe continues to build.
In meeting after meeting with companies
across the region we hear of economic
recovery.This has been most visible in
countries like Spain, which embraced
austerity and are now reaping the bene ts
of improved competitiveness and
re-activated private sector dynamism.
The political backdrop also remains
supportive. Despite the‘free hit’ success
of anti-European parties, such as UKIP, at
the recent European elections, mainstream
pro-European parties still managed to win
70% of the seats. Even in France, recent
polling suggests that a healthy majority
remains in favour of the EU and the euro.
In contrast, more internationally oriented
companies are facing greater challenges as
the emerging world slows down following
several years of booming economic growth.
We also often hear that the US recovery is
not quite as vigorous as many had believed.
Consequently, more domestically oriented
companies still constitute almost two-
thirds of the fund. Most notably, banks
and companies from the periphery of
Europe now represent 29% and 27% of
the fund respectively. Following our recent
investments in the telecoms sector, utilities
now comprise almost 20% of the fund.
THREADNEEDLE
INVESTMENTS
Strategic Managed
Tug-of-war in stock markets expected
amid concerns on European deflation
S. W. MITCHELL CAPITAL
Continental European
Joint manager: Greater European
and Greater European Progressive
The case for Europe builds with a
very optimistic outlook for equities
The recent rally in
bondproxies has
worked against us
Ahealthymajority
remains in favour of
the EUand the euro
Richard Colwell, Stephen Thornber
and Jim Cielinksi
W
e suspect that reductions in growth
expectations for the emerging
markets, representing two-thirds of global
growth, will become a common refrain over
the next two years, especially as accelerating
US economic improvement later in the
year is likely to force its monetary policies
to normalise. Europe has stabilised, though
growth will remain subdued in the face
of ongoing structural and demographic
hurdles. In Japan, currency devaluations
have strengthened economic growth,
although increases in consumption taxes
will prove challenging. Country-level
political instability and regional geopolitical
risks have also heightened recently.
Despite these challenges, we believe the
current environment provides a favourable
backdrop for Select Equity’s investment
style.We invest in established franchises
with unit-growth tailwinds, pricing
power, solid balance sheets and sustainable
competitive barriers. These businesses lead
their respective industries and generate
strong, growing streams of free cash ow
in a predictable manner. Many of our US
businesses should ultimately bene t from
favourable comparative advantages that
should yield growing capital investments,
while our European and Japanese businesses
should enjoy recovering demand at
home. We believe our companies trade
at substantial discounts to their intrinsic
values, and their share prices will re ect
their strong earnings growth pro les.
George Loening and Chad Clark
SELECT EQUITY
Joint manager: Worldwide Managed and
Worldwide Opportunities
Reduced growth expectations for
emerging markets will be the norm
Europe has stabilised,
though growthwill
remain subdued
Stuart Mitchell
All information correct as at 30 June 2014
