The most recent post-Brexit macroeconomic data coming out of the United Kingdom is remarkably robust, says David Lambert, senior portfolio manager, European equities, at RBC Global Asset Management (UK) Ltd.
"If we were to talk last year about Brexit happening and Trump," says Lambert, "people would probably have told you the markets would be down and down a lot, which they're not. Even with political clouds on the horizon in Europe."
The only area where the RBC managers have seen weakness -- in the wake of last year's June referendum in which a UK majority voted to leave the European Union -- is in public-sector spending in the UK. The RBC mandate has little exposure to stocks in that area, "so Brexit hasn't affected our investment philosophy at all," says Lambert.
From a valuation perspective, Lambert says that Europe on a global basis looks cheap and has looked cheap for some time, but other dynamics are happening. "We're seeing business-earnings upgrades coming through for the first time now since 2012, says Lambert, "and earnings revisions are positive."
Lambert, who is based in London, is the lead manager of the $6.3-billion RBC European Equity. He has been adding cyclical names to the fund over the past six months in anticipation of rising stock-price momentum and top-line growth. "This improvement expectation," says Lambert, "has been heightened by a potential regime change in a number of economies with the adoption of fiscal stimulus. U.S. President Donald Trump's infrastructure-spend mantra is a prime example of this."
The addition to the portfolio of Dublin-based CRH PLC (CRH), a company that manufactures and distributes building materials, would clearly benefit from fiscal stimulus and infrastructure incentives. Yet "CRH wouldn't necessarily be our traditional hunting ground," says Lambert. "It's quite capital-intensive, so it's not the sort of business you expect to see in the portfolio. We have to adjust and appreciate inflection points in the market."
The managers have been adding mid-cap stocks to the portfolio where liquidity is sufficient to build positions. Lambert says mid-caps tend to be beneficiaries of cyclical upswings as well, "so that's a sensible way of transitioning the portfolio to cater to movement in the market." As well, there are more names for opportunities in the mid-cap space, so you've got a greater propensity to find "a little gem" which is high return and can grow its asset base.
The bottom-up investment approach focuses on high-return businesses and luxury brands, many of which are centuries old, with predictable, sustainable growth. "So you get that lovely, exponential compound curve over time," says Lambert.
He cites as examples huge global businesses and prestigious names such as Christian Dior, the main holding company of LVMH Moet Hennessy Louis Vuitton (LVMUY) with its vast, diversified array of luxury goods. "We're seeing top-line growth across the portfolio of Louis Vuitton," says Lambert, "and this equates to 10% in earnings growth and 10% dividend growth as well." The company's brand power, he says, enables its competitive position to remain exceedingly robust, thus reducing its business risk and enabling it to grow consistently. As well, "you've got demand in luxury goods from the Chinese consumer improving."
Other stock-selection strategies aimed at risk reduction include diversification into safer, non-Eurozone financials. Nordic banks are "little gold mines," says Lambert. In particular, he cites Swedish banks such as Swedbank, one of his holdings.
"Swedish banks are the poster children of how banks should be run in Europe," says Lambert, adding that they are "actually very similar to the Canadian banks from that perspective." He views Canadian banks as being some of the strongest banks in the world. "The Swedish ones are exactly the same," says Lambert. "They're high return, pay very high dividends, but they don't look to grow for growth's sake. The banks are run as a utility that pays a dividend to shareholders."
The financial sector, which currently represents 20% of the mandate, has also benefited from the expectation of interest rates rising, adds Lambert.
Further risk-mitigation measures include the addition of a small currency hedge that was put back into the fund, to protect against the possibility of a sharp decline in the euro. There are various political events coming up, such as elections in France and the Netherlands, which could affect the markets. "We're just talking about what Europe is going to look like in five years' time," says Lambert. "As it happens, the euro has remained relatively robust after last year."
In positioning the mandate, "the focus is on the companies, not the politics," says Lambert. "The headlines are all on the politics. So I just urge people to do what we do. Look at the businesses. Don't get put off by the noise and the bluster, which we can't predict, nor predict the outcome."
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