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Manager interview: Sea of opportunity in Europe has tide turning for earnings

Liontrust’s Olly Russ and Oisin O’Leary welcome the uptick in European corporate earnings, but warn an abrupt halt to quantitative easing could increase volatility

Manager interview: Sea of opportunity in Europe has tide turning for earnings

Olly Russ (Citywire + rated) and Oisin O’Leary co-manage the Liontrust European Income fund. Here they explain why an end to quantitative easing in Europe could boost their financials stocks.


What are the income opportunities in Europe?

Olly Russ (see main picture): There are quite a diverse set of opportunities. The UK market is well known for providing income, but there are broadly three times as many income opportunities in Western Europe as in the UK.

These are in pretty much all of the same sectors that the UK has, plus one or two additional sectors, such as aquaculture. This includes salmon farming in Norway or even oil services, which are not well represented in the UK. There’s a pretty diverse range of stocks to choose from.

Oisin O’Leary (pictured below): To highlight another sector, for example, telecoms, in the UK you have three main names. But if you look outside the UK you have an additional 18 names.


So there’s a greater investment pool?

Olly Russ: There is, very much so.


As an income fund reliant on dividends, are there growth sectors you avoid, such as technology and biotech?

Olly Russ: Not so much avoid, but it is more difficult to find names in those sectors. An income fund such as ours would typically have biases towards financials, telcoms and utilities perhaps. We do have the odd tech name. There’s Cerved Information Solutions, which is really credit data, in Italy. But biotech is much harder to come by.

There are sectors where we can’t really find that many income ideas. The sort of characteristics we look for tend to be in more traditional sectors.


You seek to avoid capital intensive companies. Doesn’t this limit your investment choice?

Oisin O’Leary: Well it’s true, we tend to focus outside capital intensive companies. This is purely because companies operating on an asset-light model will tend to generate higher rates of return on equity, which then can enable higher dividends. But I wouldn’t say it limits our investment choice so much, purely because there is such a wide pool of opportunity, as Olly alluded to, in Europe.


Following the victory of Emmanuel Macron in the French presidential election, isn’t the good news on Europe now priced in?

Olly Russ: I think the election of Macron probably took some of the potential tail risk out, though I don’t think in itself it was that significant an event.

The real good news about Europe is one of corporate earnings. This is where Europe has lagged the US significantly, really since the Eurozone crisis got under way in earnest five or six years ago.

The good news is finally we are starting to see a turning in European earnings. So this year we should comfortably see double-digit earnings growth in Europe, which we haven’t seen for years. This is a significant change for investors.


What would an end to quantitative easing in Europe mean for your fund?

Olly Russ: Rising yields, which is presumably what this would mean in the longer term, helps value strategies such as ours outperform. Particularly within that I think financials are sensitive to rising yields, as we’ve seen already through the second half of last year. So I think in relative terms it could be beneficial.

Oisin O’Leary: I also think it depends on what type of exit we have. If it’s a slow and gradual exit, you would expect a more muted impact for the markets. A short, sharp, abrupt exit could potentially bring more volatility into equity markets.

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