The update below is authored by Janus Henderson Investors and reproduced, with permission, by Willis Owen.
European equities continued to confound a pessimistic consensus in the second quarter. On a global basis, more market cap was lost in May than in December 2018 when European markets had their worst month since the global growth scare in the first quarter of 2016. In contrast, June was one of the strongest Junes on record for equity markets.
We remain much more optimistic than the seemingly vast majority of our peers and are not chasing the 'global recession' trades. It is not easy to hold a bullish view in the face of ever-worsening headline data, but aside from very cautious investor positioning there are a number of factors that give us conviction.
Firstly, global real money growth continues slowly to improve after bottoming in October/November 2018, suggesting a third quarter 2019 low in industrial output momentum. Euroland money growth trends are beginning to encourage.
Second, despite lower overall purchasing managers' index (PMI) readings, the global new orders versus inventories series expanded its recovery further in June. A lot of the current macroeconomic softness seems to be caused by de-stocking, which can only run for so long. As before, for further clues we turn to the semiconductor sector due to its early cycle nature. Here, the year-on-year monthly shipment decline rate is now no longer worsening and companies are starting to report book-to-bill ratios in excess of 1.0x again.
Moreover, we are now entering a phase when comparable figures from the prior year are getting a lot easier. For instance, monthly China autos sales, Japan machine tool orders and South Korean exports are soon beginning to annualise negative change rates. In the face of normalised inventories it is harder to see things getting incrementally worse from here. We remain convinced our business is about the rate of change, and often things becoming less negative produces some of the best share price returns. Historic analysis on US markets suggests that the share prices of the industrial sector underperform the market in the 12 months prior to yield curve inversion, but outperform in both the three months and 12 months following the inversion because the risk of a recession has been discounted.
Lastly, we continue to believe that policy aggression will beget policy panic, as the new US-China trade truce already seems to indicate. On China's side, sharply rising domestic banking stress and a slowing economy, potentially leading to more political dissatisfaction - see Hong Kong - are putting pressure on the government. In case of the US, unemployment is now rising in key swing states and labour market perception by consumers is turning even more sharply. Voter perception of tariffs is also turning more negative and businesses are slowing investments and becoming more vocal in their displeasure about supply chain disruptions.
German enterprise software vendor SAP was the top performer over the quarter, boosted by recent equity market strength and accommodative central banks. Its shares also reacted positively to the announcement that activist investor, Elliott, had taken a stake in the company. We also had success with German automotive, defence and electronics group Rheinmetall as the defence outlook remains solid. Galp Energia detracted due to weakness in the energy sector.
|Discrete year performance
||Janus Henderson European
Selected Opportunities Fund (%)
|FTSE World Europe
ex UK Index (%)
ex UK (%)
|1 year to 30/06/2019
|1 year to 30/06/2018
|1 year to 30/06/2017
|1 year to 30/06/2016
|1 year to 30/06/2015
* Source: Morningstar, at 30 June 2019, nav-nav, net income reinvested, net of fees, Class I Acc shares, in Sterling. Past performance is not a guide to future performance. Prices can go up and down and you may not get back the amount originally invested. NAV = net asset value.
Index - FTSE World Europe Ex UK Index
Index usage - Comparator
The FTSE World Europe (ex UK) Index is a measure of the combined performance of large and medium sized companies from developed and advanced emerging European stock markets excluding the UK. It is the performance target for the Fund and provides a useful comparison against which the Fund's performance can be assessed over time.
Peer group benchmark - IA Europe ex UK
Peer group benchmark usage - Comparator
The Investment Association (IA) groups funds with similar geographic and/or investment remit into sectors. The fund's ranking within the sector (as calculated by a number of data providers) can be a useful performance comparison against other funds with similar aims.
Fund activity review
Activity during the quarter included the introduction of international brewer AB InBev following an upbeat meeting with its management team. The company is confident of delivering an improved performance in 2019, based upon further scope for margin enhancement.
Also following a positive meeting with management we introduced German material handling solutions provider Kion Group. Aside from the cyclical element there is a structural growth trend to warehouse automation. The company also has a number of new product launches including those targeted specifically for the US market where its market share is negligible. We initiated a positon in German cap goods name Siemens as the stock is on an attractive valuation in our view, while an anticipated turnaround in the semiconductors cycle gave us the confidence to buy STMicroelectronics. We believe that the company will benefit from structural drivers from the likes of electrical vehicles, 3D sensing and radio frequency power.
Given their structurally challenged business models, we completed our exit from banks by disposing of Bankinter and DNB. Our financials exposure is now limited to security exchanges and insurance. We used periods of strength to dispose of the Smurfit Kappa holding across our funds. Elsewhere, we continued to focus the list of stocks as we exited Trelleborg, Infineon Technologies and SIG Combibloc. We believe this is the right thing to do if we are to offer our investors a portfolio of ideas differentiated from mainstream indices, which are, of course, so easily accessed by passive vehicles. This may well create an element of greater volatility of returns versus a benchmark index.
We continue to manage the fund with a concentrated number of holdings as we seek to offer investors a differentiated, yet more active proposition.
Janus Henderson Investors
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