Fund Manager Monthly Report - July 2015
View the latest portfolio and market commentaries from our range of fund managers.
Aberdeen Asset Management (Asia) – Hugh Young
Far East The fund rose by 5.77% in sterling terms, outperforming the benchmark FTSE World – Asia Pacific Index’s 5.47% gain.
Stock selection in Japan was a key contributor. At the stock level, Chugai Pharmaceutical saw healthy revenues in Tamiflu offset weaker exports of the rheumatoid arthritis drug Actemra. Diaper maker Unicharm was lifted by brisk sales domestically and overseas. The non-benchmark exposure to India also contributed. In local-currency terms, the market reached an all-time high on the back of improving growth and inflation outlooks. Sentiment was also buoyed by the recent 25-basis point rate cut and the prospect of further easing later this year. The Aberdeen Global – Indian Equity Fund’s bias towards private-sector financials and cement stocks drove relative outperformance against the local benchmark. Meanwhile, after a long period of underperformance, we are encouraged to see our holding China Mobile emerge as one of the top stock contributors in January, given the company’s good 4G prospects and healthy dividend pay-out from its cash-generative business.
Conversely, Singapore was one of the weaker performers. The local market, where the fund is overweight, lagged partly because of the currency effect as the central bank sought to tame the Singapore dollar’s appreciation in the face of falling inflation and declining growth. At the stock level, core bank holdings UOB and OCBC as well as property developer City Developments suffered profit-taking after a relatively strong fourth quarter last year. Conglomerate Keppel Corp remained under pressure amid the weak pricing environment for crude oil, although the stock recovered slightly after management sought to privatise its real estate subsidiary Keppel Land, which might help cushion the weak earnings outlook in its offshore and marine business.
Elsewhere, Standard Chartered continued to perform poorly but management has been cutting costs including closing its Asian cash equities and Swiss private banking businesses. We believe these improvements will allow the bank to better align resources to its core strategy. The share price remains undervalued for what is still a good emerging markets franchise. Similarly, QBE’s current management has brought back focus and is making progress in restructuring; it recently divested the US agency business. Although the general insurance environment remains soft, there is pricing discipline within the sector. The insurer has a comfortable capital position. Stock selection was also negative in Hong Kong. Our holding in HSBC was weak during the month.
Aberdeen Asset Management (Glasgow) – Jamie Cumming Ethical
In January, the fund’s value rose by 2.22%, outperforming the benchmark’s return of 2.10%. Positive asset allocation outweighed negative currency impact and stock selection.
Our Swiss holding Zurich Insurance continued to perform well despite the relative weakness of the market. Stockholm-based Nordea Bank was also among the key contributors to relative return. Its shares surged after it posted better-than-expected profits and raised its dividend by 44%.
Against this, Vale and Standard Chartered were among the top detractors. Vale’s credit rating was downgraded by S&P, reflecting expectations that the miner will be hampered in the near term by depressed iron ore prices. Standard Chartered continued to perform poorly but management has been cutting costs including closing its Asian cash equities and Swiss private banking businesses. We believe these improvements will allow the bank to better align resources to its core strategy.
In portfolio activity, we added to BHP Billiton, MTN, as well as Brazil’s Vale and Banco Bradesco on relative weakness. Against this, we top-sliced Eni, Centrica, Zurich Insurance and TSMC.
Artemis Investment Management – Adrian Frost & Adrian Gosden UK & International Income
An uneventful start to the year, save for a monster portion of QE, an ‘adjustment’ to the Swiss Franc and some volatility in commodity prices! The net result was a 2.6% rise in the UK equity market as investors felt moved to buy equities given the dearth of yield elsewhere.
Given our default position to hedge, our overseas investments the strength of the Swiss Franc was initially a notable negative for our Novartis holding but the subsequent recovery in the share price plus the appreciation of Sterling against the Swiss Franc, has recouped much of this.
We have been net sellers of Sanofi, Glencore, Deutsche Post and Energa. As a consequence our cash position is higher than normal. Purchases included Card Factory, Greene King, HK Electric and Ascendas, a Singaporean Real Estate Investment Trust.
Equity yields are benefitting from the ultra-low or negative bond yields. It is widely assumed that QE will have no effect whatsoever, but it is worth bearing in mind that QE occurred at a time when European indicators were looking a little better and the effects of the lower oil price had yet to be felt. If Europe were to show more growth then equities that are trading as bond proxies will do less well. This is not our assumption at present.
Artisan – Dan O’Keefe & David Samra Global Managed & Global Unit Trust
On the surface, it was a relatively benign start to the year. The MSCI All Country World Indix only declined 0.3% in January (all returns in local terms), with the 2.9% decline in the US market largely offset by a 3.9% gain in Europe. Japan ended the month up 0.3% and emerging markets increased 1.4%.
Below the surface, however, January was a month marked with surprises and significant volatility across markets, currencies and commodities. The Greek stock market sold off 24.1% after an election brought a far-left party called Syriza to power. Syriza campaigned to reverse economic reforms and end austerity, which has set it on a collision course with the rest of the European Union. Just before the Greek election, the Swiss National Bank decided to end its currency peg with the euro in anticipation of the pending quantitative easing by the European Central Bank (ECB). In response, the Swiss franc strengthened about 13% and initially sent the Swiss market down about 15% (later recovering to end the month down 6.8%). The volatility was not limited to Europe. The US dollar strengthened over 5.0% against 11 global currencies – including 9.5% versus the Canadian dollar and 17.2% versus the Russian ruble.
Among the biggest contributors to performance this month were Tesco, Novartis and Adecco. Tesco jumped 19.8% after reporting results for the critical Christmas trading season that exceeded very low expectations. The new management at Tesco is busy making significant changes, which include cutting the dividend, closing unprofitable stores, reducing capital spending and selling non-core assets. We are impressed with the new CEO and view the changes as positive. Novartis and Adecco are both Switzerland-based companies that experienced share price volatility due to the revaluation of the Swiss franc discussed above. Both companies saw their share prices rise in US dollar terms, which is surprising since they are global multinationals with more expenses than revenues generated in Swiss francs, and therefore the change in currency should have been modestly negative.
Among the largest detractors from performance were Qualcomm and Bank of New York Mellon. Qualcomm declined 16.0% after reducing its profit outlook for the year due to profitability issues in its chip business. Bank of New York Mellon shares fell 10.8% despite reporting earnings that finally demonstrated some reasonable cost discipline, allowing the company to deliver operating leverage despite sluggish top-line performance. The recent decline in the share price is most likely due to the decline in interest rates and currency impact. Microsoft and Royal Bank of Scotland (RBS) also detracted from performance. There was no meaningful fundamental news that drove the 6.9% decline in RBS shares. We believe that valuations remain generally unattractive. However, volatility can create opportunities for stock picking since it tends to result in indiscriminate price dislocations. While there was no meaningful portfolio activity during the month, we are busy evaluating many of the areas that have seen the most price movement to uncover investment opportunities.
AXA Framlington – George Luckraft Diversified Income & Allshare Income Unit Trust
Equity Markets were strong in January as the ECB announced the introduction of Quantitative Easing to try and revitalise the economy and combat deflation. The scale of the action was larger than expected. Markets largely discounted the election of the left wing government in Greece. The strength in the market was concentrated in large cap multinationals, which offer attractive yields when compared to those available in bond markets.
The fund’s performance lagged that of the market with the small cap element largely lagging the market. A poor trading statement from Game Digital pared their gains since floatation. The holding was reduced.During the month a new holding was acquired in Direct Line Group, while that of Microfocus was sold and that of Cineworld reduced.
The negotiations with Greece could well fail causing their exit from the Euro. European economies are seeing a good benefit from the fall in the oil price and should be able to withstand the fallout from any exit. If expectations grow of an increase in US interest rates, higher rated equities could correct on the back of weakness in bond markets.
Babson Capital – Zak Summerscale International Corporate Bond
High yield bonds returned to positive territory in January, overcoming a softer U.S. equity market, geopolitical concerns and oil price volatility. Favourable market technicals and the announcement by the European Central Bank that a program of Quantitative Easing will begin in March contributed to high yield bonds posting positive returns. The International Corporate Bond Fund performed well against this backdrop, with senior secured bonds outperforming the broader high yield bond market.
High Yield new issue volumes in the U.S. rebounded after a somewhat quieter December, with $28bn of primary deals priced. This figure includes Altice placing nearly €5bn bonds in a cross border transaction, nearly half of which were offered as senior secured bonds. The deal was met with strong demand from primary market participants and has continued to perform well in the secondary market. The top contributors in the portfolio for the month included names such as Brakes, a leading supplier to the foodservice sector in the UK, and Premier Foods, the UK’s largest food producer. Negative contributors during January included names such as TPC Group, a U.S. provider of products to chemical and petroleum-based companies worldwide, and Millennium Offshore Services, a provider of offshore jack-up accommodation service vessels.
In January, both the European and U.S. high yield bond markets performed positively, with the European market outperforming its US counterpart. Given the strong technical backdrop in Europe, new issues performed well. The majority of industries posted positive returns during the month across high yield markets, with Metals/ Minerals and Energy the only notable exceptions. The International Corporate Bond Fund continues to invest in a robust, diverse set of senior secured credits and is well positioned to continue providing investors with attractive risk-adjusted returns.
BlackRock – Luke Chappell UK & General Progressive
The UK Focus portfolio returned 3.8% over the month outperforming the benchmark FTSE All-Share Index, which returned 2.6%.
The UK market rose during January as the European Central Bank (ECB) announced it would purchase €60bn per month of eurozone government and asset backed securities in quantitative easing (QE), which had a positive effect on equity markets. The market was led higher by traditional ‘bond proxies’ such as utilities and companies that have delivered consistent, earnings growth as investors search for yield in light of lower bond yields.
The main positive contributors to performance included Next, Reckitt Benckiser, Compass, British American Tobacco and Reed Elsevier, which are beneficiaries of investors’ hunt for yield following the announcement of QE from the ECB. All of these companies have consistently delivered earnings growth with positive updates in recent months. EasyJet rose after reporting a better than expected quarterly trading update, particularly given a notable increase in capacity at Gatwick. Fuel hedging strategies mean the group will not feel the full benefit of lower fuel prices.
The main detractor to relative performance was Johnson Matthey, which fell given concerns around the impact of lower oil prices on its Process Technologies business. The sharp fall in the oil price may reduce demand for industrial catalysts by the oil & gas industry.
Activity over the period saw us purchase a new position in Royal Dutch Shell and add to Shire. We reduced positions in EasyJet, Rio Tinto and BG Group and sold Standard Chartered.
Eurozone economic activity remains subdued despite increasingly supportive policy response from the European Central Bank, whilst the US economy continues to expand. We expect that inflation expectations and medium term GDP growth will remain modest aided by a lower oil price, thereby limiting the risks of a substantial correction. In the longer-term, recovering global growth and confidence about monetary policy, which will remain loose to allow economies to pay down fiscal deficits, is a positive backdrop for corporate earnings and equity valuations. In a world of low but positive global economic growth we seek those companies that can meet expectations for earnings growth and drive returns through self-help with a clear strategy to deploy the cash flow they generate.
BlackRock – Nigel Ridge UK Absolute Return
The Fund detracted -0.9% (gross) in January. Record low bond yields moved lower still with most risk assets rallying on confirmation of the ECB’s QE programme. European equities reacted most positively but Greek equities dropped sharply as Syriza formed a government. Even darkening prospects in the Ukraine failed to hold back European assets and they outperformed the US. The diverging policy mix therefore looked to drive sentiment at the start of the year even as inflation continued to wane.
Long book gains only partly offset the falls in the short book. The Fund’s stock selection across consumer goods and consumer services detracted as more defensive areas of the market moved higher still. Long standing construction-focused positions in industrials made the strongest gains but this was mostly offset by short positions in lower quality businesses seeing share prices rising further. In contrast to the wider market where large caps performed strongest, our (long and short) exposure to companies with a market cap greater than £5bn detracted. The pair book only marginally detracted with banks’ positioning adding the most and aerospace positioning detracting at the other end. Essentra was the largest contributor benefitting from its exposure to Europe. Within the defensive part of the market, our preferred pick of the tobacco players in BAT was the next largest contributor. UK retail sales unexpectedly rose in December, despite the shopping frenzy created by Black Friday in November, and this was matched with surprisingly strong Christmas trading that hurt our negative view on UK Food Retailers. The second largest detracting short was in a solid but lower quality industrial company which has grown organically and through acquisition but we believe holds an over-extended valuation.
We reduced the gross exposure to 124% ahead of the headline grabbing ECB announcement and subsequently climbed to 137% later in the month. The net exposure averaged 21% consistent with the view that the short term path of least resistance for equities is up not down. January has again highlighted the impact of centralbank activity on markets though the unexpected nature of some announcements also contributed to volatility. Defensives also began the year by deviating further from cyclicals however we retain the view that the former look more expensive. We are comfortable retaining the portfolio shape despite seeing a degree of mean reversion occurring from some positions that were successful in 2014.
Edgepoint – Tye Bousada Global Equity
While the Portfolio experienced strong relative performance in 2014, we know that in order to outperform over the long-term it’s critical to be different from the benchmark. This means we will experience periods of underperformance relative to our benchmark. This is what happened in January as traditional “safety” sectors that we have limited exposure to such as telecommunications, consumer staples and utilities led the market higher while our exposure to energy, financials and technology hurt performance. We are happy to have exposure to industry sectors where we see better relative opportunity, even if they may experience short-term underperformance.
Anthem Inc. was the best performing business in January. It’s the largest health insurer in the U.S. providing coverage to about 35 million members. We view Anthem as a toll bridge Americans must cross to receive health care. For example, when a new drug is invented, an Anthem medical member acquires it through its network and marks up the price by a small percentage before selling it to its members. It doesn’t incur any research and development risk to create the drug as it only resells approved products and services through its health care system. As the owner of the toll bridge, Anthem is able to charge a small fee for its services, and this fee provides the company with very attractive return characteristics.
First State – Jonathan Asante Global Emerging Markets
The stock markets of oil exporting countries have continued to perform poorly, particularly in sterling terms, while those of oil importers have risen on expectations that local consumers, and governments, will have more disposable income to spend on goods and services from their savings at the petrol pump. We have never professed an ability to predict commodity prices, but lower oil prices and their impact upon company valuations are causing us to pay more attention to oil exporting countries which are capable of economic reform, in particular Brazil.
At a stock level, Housing Development Finance (India: Financials) and Tech Mahindra (India: Information Technology) both rose as they reported reasonable results, while Unilever (UK: Consumer Staples) climbed despite results confirming the demand outlook was still challenging.
On the negative side, Coca-Cola Hellenic (UK: Consumer Staples) declined as it is facing a difficult operating environment in some markets and Kimberly-Clark Mexico (Consumer Staples) was weak despite results that showed an improvement in volumes and price stabilisation. Tullow Oil (UK: Energy) fell due to oil price weakness.
Invesco Perpetual – Paul Read & Paul Causer Corporate Bond
There were three key events impacting European financial markets in January. Firstly the European Central Bank (ECB) announced it would be starting quantitative easing (QE) in March. The scale of the program exceeded expectations with bonds rallying in response. Secondly, in anticipation of the ECB announcing QE the Swiss National Bank (SNB) abandoned its peg against the euro. This caused the Swiss franc to strengthen significantly. Thirdly, Alexis Tsipras of the far left Syriza party won the Greek election and formed an anti-austerity coalition. The result was widely expected and to date the reaction has been limited to the Greek bond market. Higher quality bonds continued to outperform during the month with data from Merrill Lynch showing that Euro investment grade corporate bonds returned 0.9%, while European currency high yield bond market returned 1.1% with BB bonds returning 1.2% and CCC and below -1.6%. (All in Sterling hedged returns).
High yield bond yields are low by historical standards. But they remain relatively high compared to the yields available on core government bonds, like Gilts and Bunds. In terms of positioning we are defensive, our exposure is skewed towards higher quality well established high yield names, predominately rated BB. Many of our holdings are in the financial sector, where we think we are able to obtain the type of defensive qualities we are after while still achieving a reasonable level of yield. The fund also has a sizable allocation to liquid assets, including cash. This positions the fund to react quickly as market opportunities arise.
In a busier month of trading, we bought a new position in Heinz 4.875% 15/05/25 (food). We added to our positions in Wagamama 7.875% 01/02/20 (food) and Virgin 5.125% 15/01/25 (cable). We sold our position in J Sainsbury 1.25% 21/11/19 (food).
Invesco Perpetual – GTR team Multi Asset
The fund started the year well, with a broad range of ideas contributing to strong performance. With yields falling across the board, our US Duration idea continued to do well during January, as did our selective EM debt idea with yields coming down in Hungary, Poland and South Africa. At the same time, our preference for the US dollar against both the euro and the Canadian dollar paid dividends as the European Central Bank and Bank of Canada took action, which weakened their respective currencies. In the UK, our equities idea performed well as markets started the year on a positive foot. Our short UK inflation idea benefitted from a further fall in inflation expectations, with Bank of England governor Mark Carney saying inflation may turn negative before any recovery. Our long Indian rupee vs the Chinese renminbi also contributed positively, benefitting from the RBI’s interest rate cut, which markets interpreted as positive for the Indian currency. Negatives during the month included our global and European divergence equity ideas.
J O Hambro – John Wood UK & General Progressive
Once again, our essential message of recent months and years remains the same: absolute valuations within the UK stock market, artificially inflated by quantitative easing and extreme monetary policy, are unattractive to us as fundamental investors in the absence of an improvement in underlying corporate fundamentals. We remain faithful to our absolute valuation discipline, meaning we retain our high cash balance.
Meanwhile, our focus continues to be on identifying companies that can generate above-average returns over the long term through compounding growth. Unfashionably, we seek to buy and hold stakes in companies characterised by high quality franchises that generate plentiful free cash flow and which have solid balance sheets marked by low levels of debt. High return investments are scarce in the low return environment now facing us, but we believe we can achieve attractive long-term returns through the patient process of holding stocks that regularly compound their growth over time.
Magellan – Hamish Douglass International Equity
During the month, we reduced the position in Novartis following recent strong performance.
There were no material differences arising from trading during the month.
On 31 January 2015, the portfolio held investments in 28 companies, with the top-ten investments representing 49.00% of the portfolio’s total assets. The portfolio held 11.15% of its assets in cash at the end of the month.
The portfolio is currently positioned to take advantage of the following major ongoing investment themes:
- Technology/software: We believe that entrenched global software companies enjoy enormous competitive advantages and exhibit attractive investment characteristics.
- Internet/e-commerce convergence: There are a number of internet enabled businesses that have very attractive investment characteristics with increasing competitive advantages.
- The move to a cashless society: There continues to be a strong secular shift from spending via cash and cheque to cashless forms of payments, such a credit cards, debit cards, electronic funds transfer and mobile payments.
- US interest rates normalising: As the US economy recovers, the Federal Reserve will increase the federal deposit rate and begin to reduce the size of its balance sheet.
- US housing recovery: A recovery in new housing construction should drive a strong cyclical recovery in companies exposed to US housing and also provide a strong boost to the overall economy.
- Emerging market consumption growth: Through investments in multinational consumer franchises.
During the month, the portfolio returned +1.19% in sterling terms, before fees, this compares with a benchmark return of +1.94 %, giving relative performance of -0.74%. In sterling terms, the largest contributors to performance were Tesco (+0.62%), Unilever (+0.51%) and Nestle (+0.37%). The largest detractors from performance were Microsoft (-0.59%), Bank of NY Mellon (-0.22%) and SAP (-0.18%). In sector terms, Consumer Staples (+1.64%), Consumer Discretionary (+0.55) and Health Care (+0.41%) made positive contributions, while Financials (-0.60%) and Information Technology (-0.84%) detracted. Geographically speaking, the Switzerland (+0.62%), the United Kingdom (+0.55%), the Netherlands (+0.51%) and France (+0.24%) made positive contributions, while Germany (-0.18%) and the United States (-0.57%) detracted.
Majedie – James de Uphaugh UK Growth & UK & General Progressive
Your portfolios slightly underperformed a rising market during January, returning 2.0% vs 2.6% for the FTSE All-Share index.
The ECB’s announcement of QE via sovereign bond purchases was widely expected, but nonetheless regarded as positive news for European growth prospects; this was somewhat levelled by the outcome of the Greek elections and the ensuing uncertainty over the refinancing of their debt. Valuations of US equities look to be at extreme levels and economic data from China is now undeniably on a downwards trend. In short, there is much to vex about.
These uncertainties, particularly over China, meant that miners, oil stocks - indeed anything Emerging Market (EM) focused - sold off. Thus, not holding Glencore, Rio Tinto and Standard Chartered, and continuing to sell down Shell all contributed to your performance. The lower oil price looks here to stay in the medium turn and this is undeniably good news for the hitherto embattled European consumer. Tesco was a beneficiary of this as well as a realisation that the restructuring programme underway has some real credibility.
However, these anxieties meant that the more cyclical names that we hold on your behalf struggled a little: ongoing worries about regulation and generally negative sentiment weighed on RBS and Barclays; these two banks are on low valuations and should benefit from a more buoyant consumer. Investors instead favoured ‘traditional’ safe havens (ignoring their valuations and reliance upon EM for their growth) of BAT, Imperial Tobacco, Diageo and Reckett Benckiser, none of which we have in your portfolios.
You portfolios remain positioned for a consumer–led economic recovery in Europe, via stocks listed in the UK.
Manulife – Paul Boyne & Doug McGraw Global Equity Income
The U.S. and U.K. economies showed improvement while the European and Japanese Central Banks continued monetary stimulus measures. Global markets were affected by the continued decline in oil prices. The U.S. dollar strengthened and the Russian ruble experienced significant weakness. The Swiss National Bank surprised markets when they removed the franc ceiling versus the euro, which led to a rapid appreciation in value of the Swiss franc.
Stock selection in the industrials and telecommunication services sectors contributed to the strategy’s performance. Significant individual contributors included Nippon Telegraph and Telephone Corporation, Bridgestone Corporation and Hutchison Whampoa Limited. Exposure to the health care and consumer staples sectors detracted from performance. Individual detractors included Viacom Inc., Amcor Limited and Qualcomm Incorporated. We eliminated the strategy’s shares in Safran SA and Raytheon Company, as they approached fair value.
We believe the U.S. economy offers the best growth potential, but U.S. stocks appear expensive relative to Europe. In our view, opportunities exist in European companies with international operations, especially if the euro weakens, and Japan should benefit from a weakening yen. The strategy does not have any direct exposure to emerging markets, as we have concerns over their commodity exposure and potentially weakening currencies.
Orchard Street – Chris Bartram Property Unit Trust
The portfolio valuation as at 31st January 2015 was up 0.1% month on month.
We have extended two leases to ten years on units 9 & 10 at Chelmsford Industrial Estate in Essex and have completed a new ten year lease on Unit 11. Rents payable on all three are ahead of ERV. These asset management initiatives have contributed to a valuation uplift of £375,000.
The portfolio vacancy rate is 3.6% compared with 8.7% for IPD and the initial yield on the portfolio is 5.4% which compares with 5.4% for IPD.
Property Life and Pension funds
The portfolio valuation as at 31st January 2015 was up 0.2% month on month.
Whilst there has been significant asset management activity in the portfolio, there are no completed transactions to report this month.
The portfolio vacancy rate is 9.1% compared with 8.7% for IPD and the initial yield on the portfolio is 5.1% which compares with 5.4% for IPD as at 31st January 2015.
SW Mitchell Capital – Stuart Mitchell Continental European, Greater European & Greater European Progressive Unit Trust
The advent of Quantitative Easing in the Eurozone, and the victory of Syriza at the Greek elections last weekend are clearly important events but their significance should not be mistaken. Instead of reflecting an existential challenge to the whole ‘European project’, they should, rather, be seen as milestones on the long path towards the return of the Eurozone to economic normality. What is more, the end of that path, after the seven long years since the financial crisis broke, is now easier to discern.
The challenge for policy makers in the Eurozone has been to preserve the goal of a more integrated Europe, and at the same time to ensure that the more profligate countries at the periphery learn to control their finances more carefully, and make their corporate sectors more competitive. Why should the Germans and French underwrite the debts of countries that continue to threaten to default because local politicians did not have the stomach to push through reforms?
The arrival of QE is, in effect, an acknowledgement by core Europe that the periphery has reformed sufficiently that the underwriting of peripheral debt can now, at long last, be contemplated. The ECB – which is to say the Eurozone – will underwrite 20% of the bonds purchase, a key staging post in the move towards full debt mutualisation across the Eurozone. It is being recognized how much the challenged peripheral countries have done to bring their houses into order. Spain, Portugal, Ireland and Greece have all gone through unimaginable austerity; their economies are now growing again, and they are running healthy current account surpluses. The efforts made by the corporate sector have been remarkable. Just look at the job and salary cuts at Iberia, or the deep job cuts across the banking industry. Even the most ostentatiously fiscally conservative Germans seem privately readier to underwrite the debts of the Eurozone.
But what about the victory of Syriza, with its rejectionist platform, in the Greek elections? As we write, only one thing is certain: it is inevitable that some amount of Greek debt will have to be forgiven. The only debate is how this is dressed up. We are probably somewhere near the point where Syriza’s demands can be accepted and the Greek recovery, already under way, be allowed to continue. With the European Investment Bank now proposing to sponsor €315bn of infrastructure spending, we are getting close to a significant fiscal boost for the region as a whole, on top of the ECB’s monetary boost. We may well be approaching a lasting resolution to the Eurozone crisis.
This all creates an extraordinary opportunity for investing in the Eurozone. Consensus expectations remain framed by fears of a ‘euro crisis’, and valuations are low. So low, in fact, that on one calculation, current share prices can be justified only if you accept the notion that half of European companies will suffer declining returns on capital employed into perpetuity, a clearly absurd assumption. The average domestically orientated European company trades at a 50% discount to its US counterpart. Whilst the market remains anxious about the possibility of Europe ‘sliding into deflation’ the reality appears very different to this ‘stock picker’ who is constantly in contact with companies, across many different industries, and right across the whole region. Strikingly, the tone of our meetings with company executives has been generally more positive than even we might have anticipated. From Mediaset, for example, we learn that Italian advertising spend is recovering. Among the telecoms companies we can note a rising optimism that price pressure should begin to ease in the future. Spain’s construction companies tell us that house prices are now rising for the first time in six year; the Spanish economy could grow by some 3% next year. Credit conditions are improving across the region. QE, and other monetary operations are bearing down on bank funding costs, most notably in the periphery of Europe. The growth in money supply, also, appears to be gathering momentum, with a recent ECB bank lending survey showing the strongest pick up in credit demand since 2007. The results of the Asset Quality Review suggest that the financial system is better capitalized than many had thought.
Finally, the recent sharp fall – 15% – in the value of the euro relative to the US dollar should significantly stimulate growth, while the even steeper fall in the oil price will likewise help: oil at $50 a barrel probably adds ½% to 1% to annual European economic growth.
Consensus remains convinced that the outlook for Europe remains dire. We disagree. This is not the beginning of the end. It is the end of the beginning. We remain committed to more Europe-centred, domestically orientated, companies, which now constitute almost two thirds of our investments, whilst companies from that object of consensus-investor concern, the European periphery, now represent nearly a quarter of our holdings.
Emerging Market Equity
Two of our top-performing stocks in January were the Indian company Asian Paints Ltd. And Metropolitan Bank & Trust Co. of the Philippines. Asian Paints is benefiting from lower prices for the titanium dioxide and petrochemicals used in the manufacture of its paints. When combined with increasing demand for its products, we anticipate these lower input costs will result in accelerated earnings growth at the company. Metropolitan, in our view, is a well-run bank positioned to gain from growing demand for banking services in the Philippines, where falling oil prices are boosting discretionary incomes.
While the portfolio posted a gain in line with its benchmark for the month, one of our weaker holdings was Coca-Cola Icecek A.S. Serving markets in Turkey, Pakistan, Central Asia and the Middle East, this Turkish company is a major bottler in the Coca-Cola system. Beginning in May 2013, Coca-Cola Icecek encountered a series of setbacks that included the Taksim Gezi Park disturbances, a political boycott of Coke products and the war against Islamic State (ISIS) in Iraq. However, the company’s shares held their own during this difficult period and were down only slightly in January. With per-capita consumption of soft drinks in its markets still low compared to other countries, we believe this top-tier bottler is well-situated for long-term growth.
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