Richard Brown (Janus Henderson): “Inflationary pressures continue to build in the form of Global synchronised economic boom”

In a context of global uncertainty we had the pleasure of interviewing Richard Brown, who is a Client Portfolio Manager of European equities at Janus Henderson Investors, a position he has held since 2015 and talk about European Equities, the effects of inflation in the European market and ESG.

Richard joined Henderson in 2007 as a product specialist and began working on the Pan-European equities team as an investment specialist in 2009. Richard graduated with a BSc degree (Hons) in mathematics with management studies from Sussex University. He holds the Chartered Financial Analyst designation and the Investment Management Certificate (IMC). Richard has 14 years of financial industry experience.

How do you believe Covid-19 has affected the equities European Market?

It has affected the market in many ways with investors often trading the newly created ‘back to work’ and ‘stay at home’ baskets, the latter including video conferencing, food delivery and technology, the former airlines, leisure and alike. Longer term changes may come in the form of inflation. US equities have led Europe for the past decade, aided by US market’s greater abundance of ‘growth’ stocks which benefit from low interest rates. We believe the unprecedented synchronised fiscal and monetary response to COVID-19 offers the best prospect for a return of inflation since the global financial crisis. If inflation proves to be more than the Fed’s “transitory” base case, a change in market regime is likely; one which broadly favours a rebalancing towards ‘value’ at the expense of ‘growth’ and by extension, towards Europe and away from the US.

Can we see a positive growth in the Equities European Market?

Indeed, it is a somewhat simplistic premise but one we believe holds true, Europe was hit the hardest during the pandemic and stands to benefit the most during the recovery. Europe by its very construct is a cyclical market with large exposures to industrial and financial sectors. This saw both GDP and EPS growth for the region be among the worlds worst in 2020 but are now forecast to be some of the world’s highest growth in 2021 and 2022.

How do you see inflation affecting the European Equities market?

It’s critical (see answer 1). In our view inflationary pressures continue to build in the form of: (1) Global synchronised economic boom – the world is reopening, (2) Almost every CEO/CFO we meet are reporting supply chain issues, logistics disruptions, elevated costs, and raw materials and component shortages, (3) Capex spending increasing from a multi-year low, (4) Inventory levels are low, (5) Employment remains well below pre-crisis levels, thus, monetary and fiscal stimulus are unlikely to be aggressively withdrawn and finally, and possibly most importantly we are seeing wage inflation, whilst this is predominantly in the US and UK it is traditionally a good guide for how sticky inflation might be. 

What kind of companies would you recommend to include in the investment portfolios given the current situation of the market?

We believe having balanced style exposure is critical, that might sound obvious/consensual but it comes at a time when investors are heavily skewed to growth stocks and bonds – both would suffer if the next cycle is more inflationary.

Which sectors do you believe will have a major growth in the following months and how could this affect the European Equities Market?

Consumer facing stocks.

As we progress towards this post-pandemic world, many consumers have accumulated record-high savings due to limited consumption opportunities during lockdown and supportive furlough measures. The term ‘revenge spending’ has been coined to express the fervour of the unleashed consumer. The US, UK and Israel - with the most advanced vaccination programmes - offer glimpses of the consumer revival: Clothing, cosmetics, holidays, homeware, eating and drinking all feature on wish-lists. We expect this to be replicated in Europe as the vaccine programme continues apace.

How important is liquidity in the current economic scenario?

Very, valuations are high everywhere and the ability to retain flexibility is critical. We worry that investors, in their search for yield or higher returns, are locking themselves into less liquid asset classes.

Do you take ESG criteria into account when selecting stocks?

Absolutely, we are of the view that if we were to invest in systemically low scoring or failing businesses from an Environmental, Social and Governance (ESG) perspective this would result in our strategies underperforming. We consider there to be a clear link between good corporate governance - in each of the E, S and G - and the cost of capital applied by global investors.

Thank you so much to Richard Brown for his time and for the insights shared in this interview.

You can read other insights about Equities here.