Emma Wall: Hello and welcome to Morningstar. I am Emma Wall and I am joined by John Bennett, Director of European Equity for Henderson.
Hello, John.
John Bennett: Hi.
Wall: I know that you are a stock selector, but you have said that as a large cap investor you can't really avoid having some sort of macro view; and in European equities, at the moment, there are quite a lot of macro views going on. I thought perhaps we'd start with Greece. What are the risks with Greece, not just perhaps intentionally leaving, but what has to happen for Greece to stay?
Bennett: The risks of leaving, I think, I personally think if it left – I can't see how it would be orderly. We've never been before, nobody knows. We have never been here before. So I think there is no such thing as an orderly exit. I think it would be disorderly and you get convulsions in the market.
For every convulsion in the market, there is opportunity, so we have to bear that in mind. I don't think it's going to leave. I think that what needs to be done for it to stay is what Europe is actually very good at, fudge. I think they'll fudge it. They'll extend and pretend. You are getting reforms in Greece, but in my view it does look bankrupt and I think it stays in because the European project is too important to what some people might call the European elite. I don't call them that, but that's what they seem to be called. I think it stays in. And for it stay in, it has to keep reforming, but Europe will dish-up fudge; they will extend and pretend.
Wall: And then the other big issue going on the backdrop for European equities is currency. It's also tied in together, but we're seeing massive fluctuations with sterling strengthen and weakening; with dollar strength recently. I mean, where does the euro stand with all this, and how does that create opportunities for you?
Bennett: I think, the first thing you've got to do to gain any sort of edge is not look at over a very short periods of time; one month, three months, whatever. You got to look at the bigger picture. I think the yen devalued by about 50% and we are, I think, living in an age of currency wars and Europe is the latest to join that war.
I've said for the last year at least that just about everybody east of New York City is trying to export something to New York City, it's called deflation and you do that by devaluing your currency.
Draghi got the Germans over the line last autumn, and we've joined in with QE, you debauch the currency. QE is about debauching the currency, to export your deflation or the threat thereof.
So I've said very recently, 2015 is not really about equities. Equities are the result of what's going to happen in currencies and I think you do have to have a view on currencies. I think, Europe is largely performing the same as the S&P in a common currency. So that's telling you this is about currency. A weak euro is excellent for European equities; a strong euro is bad for European equities.
Wall: So is it about holding time for 2015 then?
Bennett: Yes, I do. I think that the euro doesn't need to devalue from here actually and I don't think it's going to devalue that much from here. I think most of the losses, if you like, from most of your weakness is behind us, I think. It just doesn't need to strengthen too much. That would, in my view, put a brake on European equity outperformance quite quickly. Just look at the last few weeks when the euro did spike, the (DACs) didn't like it. So that tells you, this is about currencies more than it is about the underlying equity asset class.
Wall: So, in order for European equities to have a rally, I suppose you are sitting in tight and waiting for that currency fluctuation for those opportunities to come?
Bennett: Not just that. I think the correction that we are having, I mean, it's been quite nice. I mean, the (DACs) I think lost the peak to trough – I hope it's not over actually, about 9%. I think Europe is 6%, 6.5%. I think we just need a bit more. It amazes me that people somehow, somewhere along the line have turned the 10% correction into a crisis. There is nothing. Please be nowhere near equities, if you can't take a 20% drawdown.
Wall: John, thank you very much.
Bennett: Thank you.
Wall: This is Emma Wall for Morningstar. Thank you for watching.
