Europe recovery creating opportunities for investors

Good Returns talks to Julian McCormack, an investment specialist for Platinum Asset Management in Sydney. Platinum has $25 billion of funds under management, and the firm was set up by Kerr Nielson, who was very well-known in New Zealand many years ago.

Wednesday, July 19th 2017, 11:31AM

What are some of the investment themes you’re seeing which excite you at the moment?

One of the big ones which we’re really interested in is recovery in Europe, which I think people might be surprised by. The picture that people will have in their mind is that Europe’s a place that never grows, never changes, very hidebound - it’s hopeless this place, right? And it’s useful to remember a phrase I think was said by Tony Benn, which is, “Never waste a good crisis”. And Germany hasn’t wasted this crisis. All across Europe now we see improved current accounts, very very competitive places - Spain’s just handed two million jobs in two years, in an economy of 40 million people. So, you’re really seeing this place having turned a corner, and earnings are way behind where they’ve been previously, and way behind where they’ve got to in the U.S. So, you don’t have to set records here. You can just have a cyclical upturn and do very well. We’re selective, so we don’t want all of it!

How do you tackle that?

We don’t want a hold over the defensive consumer stuff – so your Nestles, your Reckitt Benckiser’s – these are traded like bonds and are pretty expensive and slow-growers. The kind of stuff we’ve wanted are beaten-up industrials – so, think about the manufacturing base of Europe. There’s a lot of machine tools, a lot of exports into the emerging world, and they’ve done very well. But then also, the financials.

Recently we did an interview with Mark Wilson, a Kiwi guy who now runs Aviva, a big company in the UK, and talking to him about the turnaround of that business was quite stunning.

Yeah, so we see this all across Europe. We’re selective, so we don’t want to go and buy Deutsche Bank - we don’t know what’s on the balance sheet. We want, you know, the ASBs, the big boring universal banks in Europe, in good markets. What we’re seeing in Europe is a whole lot of Credit Suisse, UBS, Credit Agricole - all these guys have pulled out of fringe markets. And they leave very noncompetitive, cosy scenarios, in places with loan losses falling and loan growth rising. It’s a bit like buying the Aussie banks in the nineties. Think about how that’s gone. It won’t go as well - we won’t get a China boom - but it could be pretty prospective. And they’re very cheap.

You can’t talk about Europe and not add in political risk. We’ve had a lot of talk about Brexit, the French elections – should people be worried about that?

I think they should, in the sense that these are messy political democratic processes, but let’s just step back and put it in context. Going back 20 or 30 years, Europe was a place that had three or four active terrorist armies. We had ETA, the IRA, the Red Brigades, on and on. Now, we’re sort of freaked out by democratic processes where people are having a say. That strikes us as a bit weird. We kind of want to bet people, do you think the politics win or the economics? They’re circular, no doubt, but if you get momentum - and a place like Spain is a great example - if you get momentum in terms of the economies, the politics, they won’t look after themselves necessarily, but they’ll improve over time. We’re actually sort of seeing this.

And what about the other part of the globe, China? You’ve got some views on that?
Yeah, we’ve got a lot of money in China and, again, it’s a part of the world that really scares people. What we see there is a place that looks very likely to muddle through, rather than collapse, with areas of real strength. Think about what they’ve been telling you for five years. They want to rebalance; they don’t want to be a cheap manufacturer to the world; they want to have very strong consumption, which probably means a strong currency; they want to be much more domestically-focused than externally. That throws up some great opportunities.

But it’s a big mindset change for investors, isn’t it?

It needs to be - it hasn’t happened yet.

What’s going to be the trigger for that?

Very hard to say. We never know triggers, we only know states. What we know, and you raise an excellent point, which is that no-one’s there, and it is the biggest economy in the world. Forget about the U.S. being the biggest economy in the world, that’s just crazy. China has a billion three, billion four people; ten times the steel industry; five times the aluminium industry, and if you adjust the purchasing power, it’s by far the biggest economy.

You’ve got to be there, don’t you?

You’ve got to be there. And no-one is. Think about what it was like ten years ago. We all knew that China was great, it was going to grow forever. Well, the market was on 35 times earnings, we had no money there. Now, everyone thinks this place is a loser. Hang on, it’s just raised a billion people out of poverty in a generation – it can get the odd thing right. Is it perfect? No, not at all. Are we gonna find some pretty good stocks there? Yeah, we think we will, because this is a market that’s halved in an economy that’s doubled in size.

So, you spend quite a lot of time on China?

Yeah, a lot of time. We’ve got an Asian Fund, which is 40% China – that’s $2 billion a year just in China alone, across our funds, adding the International Fund which is 20% China as well. We spend a lot of time analysing it, thinking about it and visiting it. It’s a real focus for us.

Tags: funds management investment Markets Platinum Asset Management risk