“Europe is 30% below its peaks so there’s a lot of latent potential. We’re positive notwithstanding short-term wobbles caused by geopolitical issues,” he says
Leadership change a good thing
For him, small caps in Europe have seen a change in their pattern leadership, away from a focus on the global growth story. “Many perceived this was driven by emerging market growth. We’ve seen cheaper valuations on domestically focused companies. There’s been at the very least a slowdown in downgrades, and this is one of the reasons why small caps have performed so well.”
The European Assets Trust invests in stocks with a market capitalisation of less than €3bn, but Cosh is seeing the most opportunities in the sub €1bn part of the market.
He says: “It’s a more inefficient market, so you can take advantage to deliver more alpha. We’ve been proactive in looking in areas focused on domestic growth. In the summer of 2012 we moved into financials in Southern Europe. A lot of these were improving as competitors were retrenching.”
He highlights Aareal Bank as a good example.
Sector calls
“We’ve made investments in Spain and Italy based on stock-picking ideas,” Cosh added. “Financials have improved their demand/supply side dynamics. Companies have navigated the crisis well and now have strong balance sheets. They should be able to do well.”
In cyclicals, he looks for good businesses in their own right, again with strong balance sheets and cash flow generation. “You have to buy cyclicals at the bottom of the cycle rather than the top. In addition we have a backbone of quality, stable earners with high return on equity. These should churn out good performance no matter what the market outlook.”
