Brexit continues to be a force to be reckoned with for European investors, but there are sectors that have become attractive as attention has been pulled elsewhere.
That’s according to Citywire A-rated Niall Gallagher, who runs the Dublin-domiciled GAM Star European Equity, and GAM Star Continental European Equity, funds, as well as the UK-domiciled GAM Continental European Equity fund.
Speaking to Citywire Selector, Gallagher said Brexit dominated political discussions between 2015 and 2020, before the pandemic changed the news agenda. However, this left many important topics unresolved.
‘There’s a whole range of important issues like energy policy which have been completely neglected. In the UK we are now focussing on the shortage of HGV drivers, but it’s too simplistic to attribute this solely to Brexit. We’re seeing the same issue in other countries like the US, which has not been affected by Brexit,’ he said.
With inflation moving higher – and with expected volatility – Gallagher said there are opportunities to capitalise on, even with the scenario changing quickly. Gallagher, who has his portfolios exposed to long-term secular, global and local megatrends, said he has added allocations in unloved areas.
‘I guess what we’ve done differently this year, was to add a lot to the energy stocks. In January oil was only $55 per barrel. It’s now at $80 and we are seeing BP and Equinor, for example, generating close to 20% free cashflow yields.
‘We will continue investing in building and construction materials, with companies like Kingspan or Grafton Group. With a rebound from the pandemic and people more incentivised to spend money on their homes, we can foresee a lot of repair and maintenance work taking place.’
Regarding his banking stocks, Gallagher said that more recently he has seen decent earning upgrades. ‘We have seen banks beginning to switch on or talk about switching on dividends and pay back again, which is positive.’
The GAM Star European Equity fund invests mainly in consumer discretionary (19.14%), followed by industrials with over 16% and IT nearing 15%. Healthcare company Novo Nordisk, luxury goods firm LVMH and Infineo Technologies are its top three holdings. Geographically, the UK and Germany make up the greatest country degree of exposure at over 32.47% combined, followed by the Netherlands at 11.73%.
Meanwhile, the GAM Star Continental European Equity fund invests primarily in industrials and consumer discretionary, with 19.16% and 19.12% respectively. Novo Nordisk and LVMH also occupy the top two spots, with multinational Nestlé third. Germany accounts for just over 13% of geographic exposure. The Netherlands and Switzerland account for almost 12% and more than 11%, respectively.
Talking about his fashion stocks, Gallagher said Inditex, which owns retailer Zara, had been steadily profitable throughout the pandemic because its online businesses is completely integrated into physical locations. ‘We have quite a number of very long-held stocks, such as LVMH or Moncler, that are exposed to some structural trends that remain a constant in our portfolio.’
It is also very important to invest in decarbonisation and the transition to clean energy, Gallagher said. ‘There are some long-standing holdings of ours involved in clean energy, like insulation company Kingspan which has a very strong environmental driver, chemical company Sika and Infineon Technologies.’
Looking ahead, Gallagher said the pattern of the equity market is going to change. ‘I think there’s going to be a pretty decent growth in some parts of the world along with more fiscal expansion and more inflation. As a result, we also expect the pattern of stocks that do well to change,’ he said.
The GAM Star European Equity fund returned 54.5% in euro terms over the three years to the end of August 2021, against a sector average of 45.8%. The GAM Star Continental European Equity fund returned 49.1% in euro terms over the three years to the end of August 2021, versus a 35.6% sector average.