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EUROPEAN EQUITIES MARKET UPDATE
Rob BurnettHead of European Equities
FOR INVESTMENT PROFESSIONALS ONLY. NOT FOR USE BY PRIVATE INVESTORS.
CITYWIRE WEALTH MANAGEMENT RETREAT
OCTOBER 2011
NEPTUNE EUROPEAN OPPORTUNITIES FUND
An award-winning fund*Source: Neptune as at 30.09.11; yield on A income share class. This Fund may have a high historic volatility rating and past performance should not be a guide for future performance. The value of an investment and any income from it can fall as well as rise as a result of market and currency fluctuations and your clients may not get back the original amount invested. Copyright - © 2011 Morningstar, Inc. All Rights Reserved TM as of 31.08.11 in the Europe ex-UK Large Cap Equity Morningstar Category TM. The Neptune European Opportunities Fund won the Europe ex UK category at the Trustnet Awards 2009. This Fund may invest more than 35% in government and public securities in a number of jurisdictions. For further details please see the Full Prospectus.
Fund Manager: Rob Burnett
Launch date: 29 November 2002
Fund size: £976.6m*
Sector: IMA Europe ex UK
c.40-60 stock portfolio
Net yield of income share class of 1.06%*
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EUROPEAN EQUITY MARKETS UPDATE
We expect some tactical opportunities during the fourth quarter
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The world changed this summer
– Three policy shocks hit credit markets, impacting macroeconomics, causing lower growth
In light of this, what is the current fund positioning?
When to get more bullish?
– We anticipate constructive policy from Europe, the US and China this quarter
EUROPEAN SHOCK: PROPOSAL FOR GREEK DEFAULT A TERRIBLE SIGNAL FOR THE MARKET
Italy and Spain now being forced into recession by their own bond markets
Source: Bloomberg as at 06.09.2011. Past performance is not a guide to future performance.
Italian 10 yr yield
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Private sector losses in Greek bonds proposed and supported by EU leaders
– A worrying precedent for all European Sovereigns
Italian real yield at Euro era record of 4.5%+
Automatic stabilisers are not working
US SHOCK: GOVERNMENT SPENDING CUTS OF 1.5tn OVER NEXT DECADE, 10% OF GDP
Two large shocks in Europe and US; both negative for growthSource: Neptune research, Strategas, Aug 2011. Please remember that forecasts are not a reliable indicator of future performance. The
forecasts are Neptune’s personal views and as such this document is deemed to be impartial research. We do not undertake to advise you as to any change of our views.
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Net Federal fiscal stimulus ($bn)Current fiscal deficit is c.$1.3tn
If Obama passes his stimulus bill, no drag in 2012 but $500bn in 2013
Long-term spending cuts of $1.2-1.5tn drags GDP down by 10% and creates uncertainty for capital investment
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0
100
200
300
400
500
600
700
'01 '03 '05 '07 '09 '11 '13 '15 '17 '19
2010 Tax Cut Extension Filled The 2011 Hole.
But 2012 Faces A Fiscal Drag of 1.6
Pct of GDP
CHINA SHOCK: DEFAULTS IN PROPERTY SECTOR STARTING
Three shocks to markets: Europe, US and now ChinaSource: Neptune research, Strategas, Aug 2011. References to specific securities are for illustration purposes only and should not be taken as a recommendation to buy or sell these securities 6
China’s tightening now being feltGiven tightening credit conditions, weakest players in property now failing
Political leadership happy to deflate property bubble
Causing multiple compression and some earnings falls for China plays in Europe, e.g. BMW and Louis Vuitton
IN LIGHT OF THIS, WHAT IS THE PORTFOLIO POSITIONING?
Source: Neptune as at 30.09.11
> €5bn 78.9%
€1bn – €5bn 1.6%
<€1bn 0.7%
Cash 18.8%
Relative overweights
– Consumer Staples: +14%
– Telecoms: +11%
– Healthcare: +2%
Relative underweights
– Financials: -19%
– Industrials: -11%
– Consumer Discretionary: -7%
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Market cap split (%)
WHY ARE WE UNDERWEIGHT BANKS? LEVERAGE
BNP valuation implying a 1.7% hit to BNP total assets
Source: Soc Gen/Blomberg Aug 2011. References to specific securities are for illustration purposes only and should not be taken as a recommendation to buy or sell these securities 8
BNP balance sheet €2tn, 33x gearing to equity
Market understands Sovereign exposure and funding problems
All banks face concerns on CDS hedging, given counterparty risk
BNP Paribas
WHY ARE WE OVERWEIGHT CONSUMER STAPLES?
Consumer Staples can experience resilient sales in 2012Source: Neptune/Consensus/Bloomberg estimates, Aug 2011. References to specific securities are for illustration purposes only and should not be taken as a recommendation to buy or sell these securities.
Consumer Staples holdings’ sales evolution (2007-10)
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Staples were resilient in 2009 due to defensive nature and brand strength
Same again due in 2012
Average 2010 sales split of Danone, Nestle, Reckitt, Pernod &
Unilever
Telecoms dividends may be a large part of total returnSource: Neptune/Consensus/Bloomberg estimates, Aug 2011. Please remember that forecasts are not a reliable indicator of future performance. The forecasts are Neptune’s personal views and as such this document is deemed to be impartial research. We do not undertake to advise you as to any change of our views. Past performance is not a guide to future performance. References to specific securities are for illustration purposes only and should not be taken as a recommendation to buy or sell these securities
WHY ARE WE OVERWEIGHT TELECOMS?
Telecoms sales growth in 2012: -2% to +2%, earnings growth: -10% to +10%
Dividend yield critical for investment case; yield range 5% to 8.5%
Data story can lift earnings: 3G to 4G means data download speed will be 4-7x faster Telecom sales 2007-2011e Telecom dividends 2007-2011e
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WHAT WOULD MAKE US TACTICALLY BULLISH?
Synchronised policy response would cause a large bounce
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Hopefully, we can get policy support from three fronts
– Europe: Eurobonds and bank recapitalisations
– US: QE3
– China: loosening monetary policy will make credit conditions easier
Source: Google Images, Aug 2011
IS THERE A SOLUTION TO THE SOVEREIGN DEBT CRISIS?
Eurobonds can take place with enough market pressure
United States of Europe?
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Some form of fiscal union can work because European debt is c.85% of GDP and current account deficit is c.4%
German parliament now more pro-Europe post elections
Germany can support Eurobonds with the right concessions from Italy and Spain and enough market pressure
Source: Neptune Research and Google Images, Aug 2011.
SUMMARY
Buying opportunity post global policy response
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A shock to growth and confidence has taken place at a vulnerable time
Neptune European Opportunities Fund cautiously positioned since July in Consumer Staples and Telecoms
However, policy can become more favourable in the fourth quarter to trigger a rally
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55.22 62.54.19 36.24
Source: Lipper as at 30.09.11, IMA Europe ex UK Sector; A Accumulation share class cumulative performance, in sterling with net income reinvested and no initial charges. The performance of other share classes may differ. This Fund may have a high historic volatility rating and past performance should not be a guide for future performance. The value of an investment and any income from it can fall as well as rise as a result of market and currency fluctuations and your clients may not get back the original amount invested. Neptune funds are not tied to replicating a benchmark and holdings can therefore vary from those in the index quoted. For this reason the comparison index should be used for reference only.
Strong long-term performance
PeriodNeptune European
Opportunities Fund
IMA Sector
Average
MSCI Europe ex
UKTo 30.09.11 % return ranking % return % return
YTD -11.95 5 / 104 -18.07 -16.95
1 year -8.29 21 / 104 -11.41 -13.23
3 years 10.84 23 / 92 5.27 2.41
5 years 17.58 7 / 78 -1.61 -1.57
Since launch (29.11.02)
213.00 1 / 64 82.22 86.35
Under Rob Burnett (06.05.05)
93.05 3 / 74 35.66 36.26
CUMULATIVE FUND PERFORMANCE
Moneywise Fund Awards 2009 &
2010 North America
Sector Winner
Gold Standards Awards 2009 & 2010
Gold Standard Winner
Best European Equity Fund
Best US Equities Fund
Active North American Equity Manager Award
High Alpha Equity Manager Award
UK Equity Small Winner - 3 YearsEquity North America Winner - 5 Years
Trustnet Awards 2010
Neptune US Opportunities Fund wins North
America award
Neptune European Opportunities Fund wins
Europe ex UK award
NEPTUNE’S INDUSTRY RECOGNITION
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CONTACT DETAILS
Neptune Investment Management Limited 3 Shortlands, London, W6 8DA
Tel: 020 3249 0100Fax: 020 3249 0123
Patrick Berton, Sales Director 020 3249 0104
Adam Hughes, Head of Intermediary Sales 020 3249 0158Tom de Lisle, Intermediary Sales Manager 020 3249 0176
Emma Knight, Sales Support Manager 020 3249 0177
Jake Perkins, Sales Support, Retail 020 3249 0160
Calls may be recorded for monitoring and training purposes and for your protection
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IMPORTANT INFORMATION
This document is issued by Neptune Investment Management Limited (“Neptune”), 3 Shortlands, London, W6 8DA which is authorised and regulated by the Financial Services Authority, FSA number 416015. Details of Neptune's regulatory status and authorisation by regulators in other countries are available from us on request. The Neptune web address is www.neptunefunds.com
Some information and statistical data herein has been obtained from sources we believe to be reliable but in no way are warranted by us as to their accuracy or completeness. These are the analyst’s personal views and as such this document is deemed to be impartial research. We do not undertake to advise you as to any change of Neptune's views. This is not a solicitation or an offer to buy or sell. Neptune Investment Management Limited has produced this report for private circulation to Investment Professionals only. The material is not intended for the use of Private Investors. All information is given in good faith but without any warranty.
Neptune Funds are available to any persons that may be marketed to under the Financial Services and Markets Act (Promotion of Collective Investment Schemes) (Exemptions) Order 2001. Private Investors should consult their Independent Financial Adviser or other authorised intermediary.
This communication is only intended for persons resident in jurisdictions where such distribution or availability would not be contrary to local laws or regulations.
The provision of investment services may be restricted in certain jurisdictions. You are required to acquaint yourself with any local laws and restrictions on the availability of any services described.
Please check whether such products are available in the country in which your clients are resident. None of the Neptune products are available to residents in the United States.
Some Neptune funds may have a high historic volatility rating and past performance should not be a guide for future performance. The value of an investment and any income from it can fall as well as rise as a result of market and currency fluctuations and your clients may not get back the original amount invested. These funds may invest more than 35% in government and public securities in a number of jurisdictions. Forecasts and past performance are not an indicator of future performance.
The current Prospectus, Simplified Prospectus and most recent annual and semi-annual reports can be obtained by calling 0800 587 5051 or downloaded from www.neptunefunds.com.
Any past performance data that has not been shown is due to the information not being available. Neptune is not authorised to give investment advice and only provides information on Neptune products.