John Botham of Henderson Global INvestors predicts low returns over the next decade
John Botham, European fund manager at Henderson Global Investors, told independent financial advisers to expect little more than a muted cyclical recovery on the continent, and low returns over the next decade.
Botham, speaking at the Investment Week Markets Forum, cautioned that the returns during 2002 will be less than those seen in previous recovery years, while returns in the decade to come, will be less than the 15% compound returns of the 1990s. And these lower returns will come with higher risk, he added.
He said the recovery would be cyclical due to the lack of the key drivers that are usually apparent with a secular bull market.
'These are falling bond yields, which increase the present value of future profit streams, and rising return on equity. Both of these factors helped significantly during the 1990s but we don't expect they will play such a strong part in the coming decade,' he said.
'That is because German bond yields fell from about 9% in the early part of the last decade to around about 4.5-5% now. If you assume that inflation is going to average 1.5-2% and you assume we are going to continue to acquire a 3% real bond yield, yields have not got much further to fall. The bond market will not provide the stimulus for a secular bull market throughout the next decade. Furthermore, the last decade was characterised by rising return on equity in Europe. We do not expect that will return over the next 10 years.'
Botham said he had always considered the story in Europe to be a case of two steps forward and one step back, being mostly good news but offset by occasional bad news. He no longer believes that to be the case.
'There has, on balance, been a shift to the left in politics in Europe and a movement toward anti-globalisation. Certainly, the environment in Europe is less good for business than it was five years ago,' he added.
'Much of the low hanging fruit in terms of corporate restructuring has been picked. At a governmental level, many of the easy reforms have been made, for example the changes in temporary employment legislation. Many of the more difficult political decisions are yet to be taken and in many countries the Government shows little appetite for doing so.'
As for reforms slowing down, Botham said they never really got started. There are now some proposals on the table in Germany and Italy in particular, but Botham described these reforms as the 'great white hope through the mid 1990s that has not come to pass'.
Meanwhile, he said the recent collapse in European equity markets has damaged investor confidence and the move toward an equity culture has slowed.
But it is not all bad news. There are still some individual companies with restructuring potential. In Germany, there are a number of conglomerates whose sum of parts are more than the current share price, he believes.
'Restructuring is a consistent theme of European companies and is done on a softly-softly basis, rather than the big banner headlines you get in the UK about people being made redundant,' he said.
'Finally, love it or hate it, the euro has been successfully introduced in Europe. That is a positive factor.'
Botham's £404m Henderson European Capital Growth fund is ranked 44 out of 100 funds over one year to 4 February in the Europe ex-UK sector. The AAA-rated portfolio has returned -26.68% against a 26.68% offer-to-bid fall for the sector average.
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