“The fact is we have got 26 longs and 37 shorts at this moment in time which does give you an indication that we are finding it significantly easier to find shorts from a variety of different places within the portfolio. That really mirrors the sense that 2017 is a year that is going to see Europe stuck,” he said.
European banks, which have seen falling margins, pressures on income and an inability to cut costs, is one area Browne thinks will produce little to no return.
“In particular, Europe has a very odd banking structure,” he said. “You have only two quoted German banks which represent 5-6% of the overall German market. The vast majority of banks in Germany are mutual banks. They have no profit motivations, extremely strong balance sheets and can run on variable costs for years on end which makes that business increasingly unprofitable.” This is a trend Browne is observing in the Italian and French banking sectors as well.
The European luxury goods and airlines sectors are also looking like shorting candidates in Browne’s estimation. The former is suffering from a medium-term structural decline and the latter is contending with overcapacity concerns combined with slightly falling demand in the long-term, he said.
Browne also pegs pension funds and pension fund liabilities as being in a precarious position in the European markets and anticipates this will become a pressing political issue in the near future.
“There is nothing worse for increasing your liability than falling interest rates,” he noted. “There are a number of pension schemes around Europe which are still on guaranteed rates, let alone those that need to go through a triannual review. These are going to produce significant pension fund deficits across the board.”
“As we are now in a period of what is soon to be permanently lower interest rates, then quite clearly we are going to be in a position where significant greater contributions are going to need to be made to bolster those funds,” he contuned. “Given the ageing nature of the majority of the European population, notably France, the UK or Scandinavia, this is going to become an increasingly big issue as we go forward,” Browne concluded.
