hello and welcome to ft markets after a
torrid start to the year investors are
starting to question the strength and
longevity of the European stock market
we've had a bull run for several years
now but things are starting to look a
little difficult to join us to discuss
this today we have Barry Norris head of
the Argonaut absolute return fund thanks
for joining us bear enclosure now so you
were back in 2009 so bullish about the
market that you took out a billboard ad
advertising how confident you were
weren't you well certainly in 2009 we
felt it was a once-in-a-decade
opportunity to invest in the asset class
that's been proven to be correct on
European stock markets of roughly
doubled from that point but I think the
main source of that returns certainly
since 2010 has been a rear ating which
has been very dependent on global
liquidity and irie rating you mean sort
of the price that the valuation which
investors are prepared to put on stocks
has gone up a lot rather than the
underlying earn absolutely so back in
2009 we could see that the global
economy was bottoming out corporate
profit margins were very very low and as
a result we saw market earnings rebound
by about forty percent in 2010 and we
can see this in the chart here
absolutely that's sort of the the blue
column showed the valuation of the
market the red line we've got running
across which has been flat for a long
time that shows expectations for
earnings in the year ahead at any moment
absolutely and then the valuation is
that green line so what happened so 2010
forty percent rebound in market earnings
obviously regaining some of the
aggregate level in 2007 before the
downturn but since 2010 we've seen a
flat lining in corporate earnings in
Europe the mix has changed so you'd have
in the last two or three years we've
seen a recovery in domestic Europe
whilst those geared towards emerging
markets commodities we've seen a
fall-off in earnings nevertheless market
earnings as a whole flatlining really
for the last five years so we had a
recovery in stock prices but not really
underlying profits by the company
absolutely valuations have gone up but
corporate profits haven't and certainly
as an equity investor that makes me a
little bit uneasy I would rather invest
in a market where profits are growing
rather than just valuations are becoming
more expensive and I think you've got
another chart here which shows sort of
what what type of investing has worked
in the last few years yeah absolutely so
if we move to this graph here which
basically shows growth investing as an
ideology versus value investor as an
ideology so put crudely a growth manager
will invest in high-quality companies
maybe they've got competitive advantages
strong balance sheet good management etc
etc a value manager will will look for
cheapness yes and so since the financial
crisis growth managers have
significantly outperformed value
managers we would argue that that is
because the market for corporate
earnings has been so difficult that the
factors that growth managers always look
for ie high quality companies strong
balance sheet free cash flow high return
on equity have been rewarded more in
this cycle and certainly the previous
cycle when they did very poorly because
it's been such a difficult environment
for corporate profits in general and
generally the more difficult the
economic environment the more
competitive advantage and the more
investing in high quality companies are
is linked to their ability to generate
profit growth so so so seven years ago
you were very bullish yeah now is it is
it a question that you just think value
is going to come back into focus or are
you negative on the sort of the outlook
for the stock market as a whole I think
the next six months at least are going
to be very very tough this rewriting
that we've seen of equities has
basically been correlated to bond yields
coming down and if bond yields are no
longer coming down because liquidity is
being withdrawn then I think you won't
get that re rating in the equity market
great thank you very much for joining us
bearing so it looks like a turbulent
start to the year and some very
difficult times lie
head