Hedgeweek exclusive: TT International’s Charlotte Roden discusses re-emerging interest in Europe-focused equity investment strategies among US investors following years of lukewarm sentiment.
- US investor interest in European equity strategies is re-emerging from a low base
- These allocators – seeking diversification – are undergoing a ‘rediscovery process’
- However, much still depends on the gaps that investors have in their portfolios
By Charlotte Roden
TT Mid-Cap Europe Long/Short Strategy, TT International
European equities have been off many investors’ radar screens for several years now. However, there are signs of interest in Europe-focused investment strategies again, primarily as a diversifier, but helped by what appears to be an unwind of multi-year US market growth and USD outperformance.
Exposure to Europe in North America and Asia is low and many allocators haven’t invested here in a significant way for a long time. In fact, most are going through a sort of ‘rediscovery’ process.
The perception of Europe is of a market that is much more cyclical and a bit more value oriented. In the past this naturally suggested lower growth, but the emergence of new sectors and the higher weighting to real economy capex plays – industrials, materials, energy – should benefit Europe.
Alongside the directional net, which has always been a feature of TT Mid Cap Europe Long/Short Strategy, style factors have become increasingly important, primarily in terms of risk management. Investors are more interested in a market neutral approach, where market rotation is as important as market direction.
Investors want to discuss the risk management tools we’ve been developing to help monitor the composition of style factors we’re exposed to.
In terms of the opportunity set for long/short equity in Europe, we expect 2023 to be better for stock pickers than 2022 was.
Of course, the European market has changed and evolved. Greece and Portugal used to be fertile markets. Today, we see more opportunities in Scandinavia, as well as Poland, which has a notably liquid market and vibrant IPO scene.
There are also more growth stocks and new companies, with a handful dominating interest. Europe used to be about financials or oil. Now it’s also some tech and luxury, ASML and LVMH.
This year, as we continue to move from QE to QT, opportunities should open up on both the long and the short side. The benefits meeting a broad range of managements and independent research will be important, especially in the Mid Cap space.
Many growth stocks have been derated – some that don’t deserve to be, especially those that have good growth rates and generate cashflow and profit. On the short side, there are companies where the balance between debt and equity is wrong. It will become evident that some of these are going to struggle as we go through a refinancing cycle.
Intra-sector dispersion will also be important. One example is Europe’s semiconductors sector. The headline numbers for European producers of semiconductors suggest performance is strong – driven by segments where there’s good visibility and good demand, such as auto. However, at the consumer end, home tech, where demand has been very poor, pricing has deteriorated very quickly, with no visibility.
So, yes, while we are seeing signs of broad interest in long/short equity, much still depends on the gaps that investors have in their portfolios.
Charlotte Roden is a client and product specialist at TT International, one of the longest-running equities specialists in London. Her insights feature in Hedgeweek’s March research report, covering equity hedge funds. To access the report, follow this link.