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John Bennett believes European equity markets may pleasantly surprise investors.

John Bennett, manager of the Gartmore European Selected Opportunities Fund, is not enthusiastic about the prospects for the European economy. “The macro outlook ranges from poor to positively terrifying,” he says. But that does not stop him being positive about the outlook for companies and stock markets. “At a micro level, Europe has rarely been fitter. Companies in Europe are in rude health.”

That is not the paradox it seems. As John points out, there is no correlation between economic growth and stock market performance, in Europe or anywhere else. So, while European governments – and particularly those in the south such as Greece, Italy, Spain and Portugal – are labouring under the burden of huge debts and the need to make big public spending cuts, European companies have strong balance sheets and healthy margins.

Despite that robust position, however, valuations of European stock markets are low by historic standards. John prefers to look at trend earnings – over a cycle, rather than one individual year – and he estimates that Europe currently trades on an average of 10.2 times earnings, well below the long term average of 12 times. That reflects the fact that, for the last few years, investors have been pouring money into assets like bonds and emerging markets rather than Europe. “In five years’ time, the biggest surprise is likely to be that we will look back and say that western markets have outperformed emerging ones.”

He believes that blue chip companies, in particular, are undervalued at the moment, so over 90% of the Fund is currently invested in these kinds of companies. “The Euro Stoxx 50 Index, which includes the largest European companies, has collapsed compared with the broader market,” John points out. “I expect that to change within the next 12 months.”

John only took over the Gartmore European Selected Opportunities Fund in February and has been managing money in the region for 20 years. His track record is impressive: his GAM Star Continental European Equity Fund was top quartile over 3, 5, 7 and 10 years, as at 30 November 2009.

So, more of the same was the order of the day when he joined Gartmore. He brought his team with him and has continued some of the themes which he followed at GAM. That includes backing technology companies, which he first started to buy two and a half years ago. “They had been severely de-rated after the popping of the technology bubble in 2000, gone from hero to zero,” John says. “But they have very strong balance sheets, their valuations are low and consolidation in the industry has started.” He is particularly keen on software and semiconductor companies – business management software company SAP is the Fund’s biggest overweight.

He is also buying health care and consumer businesses, confident that these industries will be among the beneficiaries of China’s growing economy. “The next 10 years in China will not be about mining, steel and cement but will shift to consumer and health care. There is a burgeoning consumer class and health infrastructure being installed. Europe is rich in companies doing business in these areas.” Some of them, such as Sanofi-Aventis and Christian Dior, represent significant overweights for the portfolio.

John builds his portfolio through stock picking, on sector and company basis, rather than geographically. However, he is mindful of the divide that has grown between stronger countries like Germany, and weak ones such as Spain, Portugal and Italy. This reflects his view that there are still ‘very serious’ risks to the euro, with currency speculators likely to turn their attention to other weak economies. “The bad news for the eurozone is far from over yet, with the market likely to take another run on the euro through one or more of the PIIGS.” Deflation, as governments make hefty budget cuts, will also be a big issue.

Paradoxically, he is particularly encouraged by the current unpopularity of Europe among investors. “I think positive surprises come from where the crowd is not – and that is Europe. That is more a five year than a five month view – but I have never operated with a five month view anyway.” For John, he has rarely seen large cap corporate Europe this fit, this lean, this mean.

Heather Connon has been a financial journalist for 25 years and has written for a range of publications including The Observer, Money Observer, The Guardian and The Independent.

To find out more about the Gartmore European Selected Opportunities Fund click here

Source for GAM performance: Lipper. Basis: mid to mid, net income reinvested, net of fees in euro terms, as at 30 November 2009. The value of investments and the income from them may go down as well as up and you may not get back your original investment. Past performance is not a guide to future performance. Please ensure investors read the Simplified Prospectus before investing. Funds investing in overseas securities are exposed to and can hold currencies other than sterling. As a result, exchange rate movements may cause the value of investments to decrease or increase. The views expressed are Gartmore's views and must not be taken as an offer to buy or sell units or shares in the markets mentioned. These views are provided for information purposes only. The views expressed are as at 10 May 2010 and are subject to change.

• This entry was posted on: Tuesday, 18 May 2010 14:51 BST
• Filed under: News
• Tags: Gartmore European Selected Opportunities Fund, John Bennett, News
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