Steel is an untapped sector that is set to benefit from improving economic conditions in Europe, says Olgerd Eichler, who has been increasing his allocation to the metal since the beginning of the year.
The Euro Stars AA-rated manager has added steel manufacturers ArcelorMittal, Voestalpine AG and Salzgitter to his MainFirst - Top European Ideas fund in the last month. His exposure to steel has gone from next to nothing to making up around 6% of his portfolio.
'It's an area that has suffered terribly, has brilliant value and is still seen as a controversial trade,' Eichler told Citywire Global.
'Out of the sectors that have started to see a renaissance, steel has completely been left out of the picture. It's exactly this sector that is going to benefit the most in an economic recovery,'.
His decision is motivated by his belief that the euro area will see countries such as recession-ridden Italy return to growth this year.
'I expect European stock prices to rise 50% from current prices over the next two years based on growth rather than valuation. I'm optimistic on southern Europe but I also wouldn't want to be much more aggressively positioned than I am at the moment,' he said.
The fund is currently positioned to gain from sectors that will see the most upside in a more positive environment. Financials, industrials and energy stocks make up around 70% of the fund.
Better beyond the Dax
The fund's biggest weight is to German companies. Though the potential upside of Germany's 'Mittelstand' companies has been recently questioned by other investors, Eichler's allocation is due to a strong exposure to small and mid-cap stocks. Stripping this selection, the fund is underweight Germany.
'It will be German companies that will lose out on a stronger euro and I think that we can expect Europe to outperform the Dax this year. This doesn’t mean that the Dax will fall, it just means that it won’t perform so well,' said Eichler.
'Our preference for German small and mid-caps is because we have a contact with the companies that we just can't get in Portugal and Ireland.'
Right at the bottom of Eichler's list are UK companies which make up around 4% of the fund.
'Four of the last five quarters have seen negative data in the UK and I think the pound could fall much further. Compared to the ECB, the Bank of England stepped in massively and I don’t think it is going to see the same kind of economic recovery as in Europe.'
The MainFirst Top European Ideas fund returned 71.2% in the last three years. The STOXX Europe 600 TR EUR index rose 29.7% in the same period.