Dealing with a large and diverse investment universe, such as the one that Europe’s collective equity markets represents…
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“The darkest hour is just before dawn”
The Mamas & The Papas, Dedicated to the One I Love, 1967
Since we last wrote, European equity markets have been influenced primarily by developments in the Covid-19 vaccine race. Positive news from three fast-tracked clinical trials, appears to have acted as an accelerant to a rotation that was already underway. This year’s hitherto weakest performers have been given a powerful new lease of life.
Some market commentators have characterised this as the start of a long overdue shift from “growth” to “value” stocks. Inevitably, this is an overly simplified debate, and the reality is much more nuanced. Not all of the beneficiaries of this rotation could be classed as classic value stocks – nor can all of the market’s recent laggards be characterised as growth stocks. But market leadership does appear to have changed in the last few weeks. The key question for investors should be, “for how long is this likely to persist?”.
It seems likely that the shape and timing of the post-Covid-19 economic recovery will play a crucial role in the answer to this question. Although the vaccine news represents positive developments in the fight against the coronavirus, we are still some distance from the finish line. Amid fresh lockdowns and in anticipation of a somewhat muted holiday season, the economic data across most of the world’s major economies is likely to worsen before it improves.
Nevertheless, we know from history that markets can pivot extremely quickly and have a habit of doing so well in advance of the real economy. Recovery stocks tend to bottom-out at the point of maximum bleakness. In equity markets, the darkest hour does indeed come just before the dawn.
The portfolios we manage will consist of a blend of opportunities, some of which may possess growth characteristics (such as those that sit in our hyper growth and secular growth buckets) and some of which may more closely resemble value stocks (such as those in our recovery and special situations buckets). Some positions, such as those in the cyclical potential bucket, may have different characteristics at different points in their cycle. What unites them all is that they are, from our analysis, fundamentally undervalued, with risks skewed asymmetrically to the upside.
Importantly, the allocations to these different buckets are not set in stone. They can be flexed up and down to take advantage of the most attractive long-term opportunities that we see. This means our investment approach cannot be neatly classified as growth or value –– it is truly style agnostic. For much of the last three years, the portfolios have benefited from a bias towards the growth buckets. This year, however, we have been reducing this exposure in favour of stocks that we believe look primed for recovery, whilst maintaining an optimal balance within the portfolio.
In consistently pursuing this style agnostic investment discipline, we have demonstrated an historic ability to successfully adapt the shape of our portfolios to suit the long-term opportunity set. That means investors don’t need to pick a side in the growth vs. value debate. It is possible to enjoy the best of both worlds.
This week’s highlights
Italian automotive manufacturing business Brembo, is a good example of a recovery idea that entered the portfolio in the spring. A meeting with company management in May revealed a business that was clearly challenged by the first lockdown, but capable of remaining cashflow positive for the year as a whole. Looking beyond the near-term challenges, Brembo had recently completed a significant capacity expansion which we felt would allow it to see good levels of operating leverage when the recovery arrived. Meanwhile, we saw (and indeed continue to see) attractive longer-term growth drivers, with good product positions in growing markets, including electric vehicles. Since adding Brembo to the portfolio, the investment thesis has played out positively, and the market’s recent enthusiasm for this type of business has seen its share price return to pre-Covid-19 levels.
German healthcare company Qiagen has performed well for much of this year, as a provider of reagents and diagnostics equipment to help detect Covid-19. Its share price has suffered a tougher November, however, as a result of the positive vaccine announcements. Consensus forecasts were already factoring in a normalisation of PCR testing volumes from the first half of next year, so the latest vaccine developments should not lead to downgrades. Indeed, a recovery in the company’s non-Covid-19 related revenue streams, coupled with new product launches, should allow growth to continue even as the virus tailwind subsides. Qiagen was recently the recipient of a bid from Thermo Fisher at €43, which was rejected by the majority of shareholders for being too low. Its shares now trade well below this level, and therefore look very appealing to us in both absolute terms, and relative to diagnostic peers.
Last week, we had a positive meeting with the management team of GB Group, a digital security business that specialises in identity and location verification services. We view this business as a long-term winner, with a strong product line-up in markets with excellent growth prospects. Its shares have moved to a new all-time high this year, boosted by a strong operational performance through the pandemic, with many of its clients accelerating their digital plans. The meeting provided reassurance that our investment thesis may continue to play out positively, as it invests for further long-term growth.
The names shown above are for illustrative purposes only and is not intended to be, and should not be interpreted as, recommendations or advice.
Unless otherwise stated, all opinions within this document are those of the RWC European and UK Equity Team, as at 25th November 2020.
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