Citywire A-rated Niall Gallagher is backing industrials and consumer discretionary stocks in Europe to show the strongest level of earnings rebound in the coming year.
Gallagher said he has positioned his €1.1 billion GAM Star Continental European Equity fund to benefit from increased domestic demand and an improvement in profitability in these areas.
‘Although there are large sections of the market where we think return on equity won’t return to prior levels, there are significant areas across consumer and industrial sectors that will experience a strong earnings rebound.’
‘This is particularly true in peripheral economies, where rising consumer and industrial spending, falling unemployment and rising confidence should boost company profits,’ he said.
Consumer discretionary is the largest sector in the fund at 22.64%, overweight against the benchmark of 12.07%. Gallagher devotes 20.79% of the fund to industrials with are also overweight against the benchmark of 13.07%.
Telecommunications is another sector in which Gallagher sees opportunities. He has 6% allocated to the sector, while Dutch telephone line company Koninklijke KPN is the joint second largest holding at 4.1%.
‘There are also sectors where we are seeing signs of structural improvements to profitability, such as telecoms. Select telecom stocks are about to enter a virtuous cycle of rising revenues, falling costs and lower capital expenditure.’
‘This will drive a significant expansion in free cash flow allowing both for rising cash dividends and a value transfer from net debt to equity inside of enterprise value,’ Gallagher added.
Two sectors Gallagher thinks lack opportunities are energy and financials. He currently has 7.26% allocated to the financial sector, which is underweight against the benchmark weight of 22.14%.
‘Looking at the energy sector, supply and demand dynamics remain negative, giving scope for the oil price to drift lower, and yet the major oil company stock prices’ are not discounting this in valuations,’ Gallagher said.
‘We also remain negative on European banks as quantitative easing continues to have a highly detrimental impact on net interest margins, loan growth is not yet sufficient to compensate, provisions for loan losses have largely declined already and capital requirements continue to ratchet higher.'
His comments are the opposite of those espoused by Mandarine Gestion veteran Marc Renaud, who championed both oil and gas and financials in an interview with Citywire Selector earlier this week.
The GAM Star Continental European Equity fund returned 55.2% in euro terms over the three years to the end of December 2015. This compares to a rise of 45.3% by its Citywire-assigned benchmark, the FTSE World Europe ex UK TR EUR, over the same period.