e-fundresearch.com: What are your personal lessons learned from 2014 market developments?
Arnaud d’Aligny: 2014 was a year of modest performance for European equities but showed substantial reversals in a market which, despite a low volatility regime overall, displayed spikes in volatility. Although average volatility remained low over the full year, this didn’t prevent substantial market corrections and wide inter-sector return dispersion. 2014 was therefore a reminder that investment styles that work well can quickly stop working, requiring managers to show the flexibility to anticipate, when possible, market trend reversals, detect them if not, and quickly adapt to them. In 2014, we had a bit of everything: small caps started the year well, but were overtaken by large caps over the summer, whilst some sectors did very well compared to others and especially compared to the market in general: such was the case for the healthcare sector, but also for telecoms and utilities. An ability to show flexibility and to pick stocks thoughtfully and carefully were therefore key in 2014 and will likely remain so.
e-fundresearch.com: With regards to the new year 2015: How optimistic is your view into the future and what obstacles and challenges should investors be prepared to overcome in 2015?
Arnaud d’Aligny: The overall market environment will likely remain challenging in 2015, with sluggish growth in Europe, persistent political and geopolitical risks, the end of the commodity supercycle, and a likely volatility arising from the actions of Central Banks around the world (including the upcoming policy divergence of the US Fed and Bank of England on one end and the ECB and Bank of Japan on the other end). However, Global and European growth is slowly improving and several factors appear supportive for European equities: valuations have re-rated but remain reasonable in a historical context, earnings growth could now become the next driver of equities performance (notably as a result of a rebounding global growth, lower energy prices and a weaker Euro), and investor positioning and flows have been and remain very negative towards European equities. In addition, Equities, and European Equities in particular, appear today as one of the few asset classes that can deliver positive real returns, notably when compared to credit asset classes that can only yield negative or low real returns.
e-fundresearch.com: Why should investors consider an increase in allocation to your asset class in 2015?
Arnaud d’Aligny: We think investors should consider increasing their European equity allocation, for several reasons. First, equity is today the only traditional asset class still offering attractive returns in real terms. Second, and that applies in particular to European equities, we think there is potential for a 6-8% earnings growth in 2015 that will support company valuations. European companies are notably going to start reaping the benefits from lower oil prices and the lower Euro/Dollar exchange rate. Third, in Europe, stock levels still trade below their long term average P/E levels, which cannot be said for the US equity markets.
