European equity star expects return to ‘Nifty Fifty’

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Euro Stars AAA-rated David Dudding is expecting to see a gradual return to a 'Nifty Fifty' of top performing stocks across Europe as those that continue to grow trade at an ever growing premium to their rivals.

With more investors moving out of bonds and into equities as they hunt for better yields, Dudding thinks a number of  large and mega-cap companies are actually moving further ahead of their rivals, taking advantage of more favourable levels of debt and new markets to deliver decent levels of growth and yield despite the difficult macro backdrop.

He told Citywire Global that many investors were underestimating the ability of many European mega-caps to continue to keep growing at a time when some are concerned over many trading at historically high valuations.

Strongest get stronger

Beverages giant Anheuser-Busch InBev, and consumer goods mega-caps Nestlé and Unilever are the three biggest holdings of his Threadneedle European Select respectively, making up 17% of the €1.87 billion fund and Dudding thinks all three can continue to outperform over the long term.

Other key large cap overweights in his top 10 include German medical group Fresenius and genetically modified crops giant Syngenta.

Threadneedle European Select Inst Acc EUR'People forget how easy it is for these companies to raise money cheaply,' said Dudding. 'InBev have just raised 30 year debt at 4.5% so the dividend yield it generates is actually higher that its 10 year debt so why should the equity not be more expensive?'

He added: 'We are not at all worried about Nestlé. It has slightly underperformed the markets over the last year but it has only just underperformed relatively because of the huge [share price] rises made by the banks and its premium has changed very little.'

'Over the last 20 years Nestlé's annual compound return in sterling is 15% with very low volatility and it has around 40% of its revenues coming from emerging markets.'

'Fresenius has just raised its biggest ever amount of debt and Syngenta has been trading on 16 times earnings for a long time but it is still not a household name in the retail market.'

Despite a long standing aversion to most banks due to their low yields and generally opaque business models, Dudding has recently added UBS after the firm announced it would shed its investment banking arm and focus on its wealth management arm.

'It was not good at investment banking but the focus on wealth management is a credible restructuring story.'

He has also recently bought Irish airline Ryanair, on a view that the firm has strong pricing power.

'Its average fare is going up but they are still much lower than the European average so they can raise them.'

Overall, Dudding remains optimistic that the worst is over for Europe even though the fundamental debt problems have not been solved.

'We think we are over the worst but regardless of that our fund is designed to give slow and steady returns. The bond markets are overbought but that might prop up equities for now.'

Over the past five years to the end of December, the fund has returned 26.4% compared to a loss of 3% by its FTSE World Europe ex UK TR benchmark.