Manager of the RWC Europe Absolute Alpha Fund, Ajay Gambhir (pictured) believes that European Equities offer his equity long/short strategy some of the greatest investment opportunities in the last ten years.
Gambhir has highlighted two reasons for optimism for the asset class. Firstly, the dislocations in European equities have been so severe that the opportunity for long/short investing between sectors and stocks is greater than it's been for almost ten years. Secondly, the almost unprecedented gap in value between European equities and European corporate credit opens up the opportunity for money to rotate into European stocks, with the greatest benefit to accrue to higher yielding European stocks.
“Europe is looking increasingly attractive; inflation expectations have stabilised and equities are cheaper than usual compared to the US. The ECB's bond-buying plan means they are ready to stand behind the Euro, reducing the tail risk. Credit investors having been moving up the risk curve so, logically, the next large opportunity is for money to rotate from credit into equities, given the large valuation gap.”
According to Gambhir, the variation of valuations within sectors is higher for 75 per cent of sectors than five years ago, before the financial crisis began. “From a long/short perspective, it is interesting how the market has polarised with 50 per cent of the Stoxx 600 European stocks with dividend yields higher than the average European corporate bond yield. As the market begins its quest for value in Europe (as opposed to looking for safety or QE beneficiaries), and at the same time pays attention to earnings, these will be come into focus and drive share prices.”
The fund was conservatively positioned for much of 2012 due to the on-going tail risk in European equities but Gambhir is positioning the start of 2013 to reflect his increasing confidence in the environment. “In 2013, I think as tail risk has subsided, we are much more inclined to take up our net and gross exposure to really maximise the opportunities presented by the dislocations.”