Where top investor is putting his money

With the Brexit pantomime developing fast, Niall Gallagher, manager of GAM Star Continental European Equity, reveals the sectors he’s backing to do well and what type of investor should buy his fund.

What are the key risks? Can another political crisis or tapering of QE by the ECB derail a European recovery?

We think it's unlikely that European recovery will be derailed by quantitative easing becoming quantitative tightening. The environment in Europe is one where the economy's picking up. There's been a lot of de-leveraging over the last few years, so we think the economy fundamentally is good. 

The risks, I guess, are more political. There is the risk of a fallout from perhaps a trade war, which might bring in the US, China and Europe. We shouldn't overstate these. In most economies most of the demand is internal so, although trade is important, it's not that important. That could, at the edges, knock confidence a little bit, but broadly-speaking we think the outlook is good and we don’t worry so much about the risks we see in front of us.

What does Brexit mean for your portfolio?

We think that the UK is going to end up with a soft Brexit because we think this is the most practical way, at least in the next few years, of managing the country's relationship with the rest of the EU. Because of that, we think the economic damage to the UK will be very minor and our companies which have some exposure to the UK will do just fine. 

In fact, if the Brexit outcome is quite soft there is arguably the potential for an investment bounce, as a lot of investment has been held back over the last couple of years. So, we think in a soft Brexit environment, which is our expectation, the UK will do quite well.

Have European equities run out of steam? 

We don't think so. We don't think European equities have run out of steam, at all. In fact, if you look at how European equities have performed compared to the US equity market, they've lagged behind very significantly over the last decade, which reflects the fact that Europe had a double-dip with the Eurozone crisis following the global financial crisis. 

In fact, we think there's a lot of catch-up between Europe and the US over the next few years as European earnings accelerate with an improvement in the economy. So, no, we don’t think they're out of steam and, in fact, we think there is more steam to come.

What do you consider to be the best opportunities right now at sector and country level?

We think there are some very good opportunities in the construction and building materials sector. The European economies were hit very hard by the global financial crisis and the Eurozone crisis and the part of the economy that was hit the hardest of all was building and construction. If we take Spain as an example, housebuilding in Spain fell by nearly 90% from peak to trough. 

So, we think that as the European economies pick up steam and as building picks up steam there is a very big normalisation to occur, and those stocks which are either house-builders or perhaps provide materials to house-builders are very well-positioned for that pickup.

In terms of countries, we like a lot of the Eurozone countries. We are perhaps most favourable on Spain and Ireland, but increasingly we're favourable on France, too. We think the confidence of the country has recovered with Macron as president. Everything we’re seeing from our companies suggests that France is picking up. We think the prospects are pretty good there, too.

What type of investor should consider your fund?

The way we invest, and I invest very heavily in my own fund, as well, is really on a three-to-five-year view. So, this is the type of vehicle for somebody who wants to take a long-term view. 

We think the compound growth of investing in European equities and the types of [comings] we select is good but, really, this is the kind of investment you should be thinking for the long-term. The kind of investor we're looking for is a long-term investor like us, who can co-invest with us in our fund.