“It feels like European markets have been subjected to some pretty violent mood swings this year, but other than the sharp sell-off in January/February sparked off by a global growth panic and the painful, but short-lived slapping inflicted by the Brexit debacle in late June, European indices have actually spent much of 2016 in a fairly narrow range,” said Taylor.
He sees opportunities at the value end of the spectrum at the moment, in contrast to many other European fund managers.
“A theme that has been running through European equities for much of 2016, as it did in 2015, is the trend for relatively-expensive stocks to get more expensive, for ‘quality’ to attract an ever higher premium and for ‘value’ to be abhorred,” said Taylor.
Recent developments have led to some extreme situations, in Taylor’s view. Global and European growth concerns, political uncertainty, deflation risks and question marks over earnings growth, together led to an intensification of the flight towards assets perceived as defensive and secure.
“Firstly, the ‘valuation elastic’ between ‘cheap’ and ‘expensive’ stocks in just about every sector has seldom been so stretched,” said Taylor.
“Currently the ‘expensive’ end of the spectrum comprises stocks and sectors in the ‘quality’, defensive’ and ‘bond proxy’ areas of the European market. It also heavily overlaps with the momentum baskets; so these stocks are relatively expensive and heavily owned,” he added.
Taylor also noted that the current degree of premium being baked into the market is on the scary side and doesn’t look sustainable. He went on to say that existing market expectations – growth, politics or earnings – hardly look to be erring on the optimistic side.
That said, a number of the more economically sensitive sectors – industrials, consumer discretionary and materials – delivered the strongest beats, highlighted Taylor. “While depressed expectations helped, the results hardly suggest the economy is falling off a cliff,” he continued.
