Fidelity remains cautious on European stocks
Sam Morse, Fidelity’s cautious European fund manager, describes Europe as “ripe for a pullback”, after he missed out on some of the market’s rallies last year.
His £2.5bn Fidelity European fund lagged behind rival funds in 2013. The relatively defensive portfolio failed to capitalise on a mounting consensus that the worst of Europe’s economic woes were behind it.
A “pullback” in the region’s market rises would help to vindicate the manager’s stance, but he also stresses that his investors are not unsatisfied with his recent performance.
“It is ironic that I would describe 2013 as a nightmare year for me but our customers have been quite happy with the absolute returns during the year,” he says.
European shares rose by just under 23 per cent last year in sterling terms, according to index data from FE Analytics, while Fidelity European gained just 17.4 per cent.
The lacklustre year followed a stellar 2012 in which Mr Morse’s focus on income-generating stocks saw him outpace the market.
“Part of the [2013] underperformance is related to the market environment where lots of companies I own have delivered what we would expect in total shareholder returns but they did not enjoy the sort of re-rating other stocks did,” he says.
He cites BNP Paribas, the French bank, as an example of a positive performer that was outpaced by others he did not own, such as Crédit Agricole and Commerzbank. Swiss confectioner Nestlé also delivered a positive but not spectacular return, he says.
Mr Morse suffered setbacks in small, individual positions last year. Saipem, the Italian oil services company, issued a profit warning in January and cut its dividend, triggering a share price rout.
“I sold the stock but it had done quite a bit of damage to the portfolio,” Mr Morse says.
Fidelity European
Tobacco product group Swedish Match reported a fall in market share – something Mr Morse says is a “temporary phenomenon”. This contributed to a share price fall from $35 in January last year to $30 last month.
Overall, Mr Morse urges investors in European shares to remain cautious.
“My personal view is that the market is ripe for a pullback on the grounds of external shock, but the continent is a bit better placed now than it was 18 months ago as we have made progress on the economic front,” he says.
“Exuberance is difficult to measure but markets were very strong in 2013 even though we did not really see earnings or dividend growth.
“We tend to look at those fundamentals and the stock market tends to look forward, which means rising share prices might be an anticipation of growth and dividends, but I am a bit concerned the market may have got ahead of itself.”
He points to director share dealing – which companies are obliged to report to the stock market – as a potential sign the top of the market may be present.
“Something else I have picked up on recently, which is a bit disturbing, is that I have looked at director selling and buying, and selling picked up in December and January,” he says.
“They are not always right and not necessarily the best predictors of future earnings growth but lots of directors are saying people have become over-optimistic about earnings growth going forward, so the shares look a bit high.
“So it looks like a good time to cash some of that in.”