Taking stock: Where to from here?

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“In the short run, the market is a voting machine but in the long run, it is a weighing machine.”

Benjamin Graham, 1940

European stock markets appear to lack direction at the moment. Following the steep sell-off in Q1 as the coronavirus crisis gripped global financial markets, we saw an impressive recovery in Q2. Since May, however, European markets have traded sideways, as illustrated below by the Euro Stoxx 600 index. The index ended May at 350 and, although it hasn’t traded below that level, it has been range bound ever since, oscillating in a narrow 7.5% band between 350 and a high of 376.7, seen in mid-July.

Source: Stoxx as at 14 September 2020.

This sideways movement has coincided with the usual summer lull in investment activity but we are now at the point at which the market’s next move may soon become apparent. To move forward positively from here, European stocks probably need to see a continuation of the improvement in economic momentum, or perhaps a breakthrough in the race for a coronavirus vaccine. On the other hand, if the second wave of infections continues to gather pace as we head towards winter, then a move lower is perhaps more likely.

The situation is finely-poised in the near-term therefore, which acts as a timely reminder about the importance of taking a longer-term view where equity investing is concerned. In this regard, Russ recently spoke in a debate about the outlook for European Equities, at which all three speakers spoke positively about the improving political landscape in the region. This follows the historic agreement on the pandemic recovery fund reached in August, which raises the prospect of fiscal transfers between EU nations for the first time. This agreement has the potential to remove on of the key fragilities of the Eurozone. Here’s what Russ had to say on the subject.

“There are reasons for optimism, though, aside from the more attractive valuations that can be found in Europe. If we see more joined-up thinking on fiscal policy, which looks more likely now than ever before, Europe has the potential to prosper coming out of this pandemic. You could argue that the political backdrop is more supportive now than it has been in many years. Ultimately, the potential for good returns always exists in parts of the market that are under-researched and under-owned. That is Europe through and through.” 

This week’s highlights

French technology business, Soitec, also performed well following a positive initiation note from JP Morgan, which explored the company’s growth prospects as fifth generation mobile networks (5G) are rolled out around the world. All appears broadly in line with our investment thesis – we view Soitec as the best play on 5G in Europe. The shares are now back above their pre-crisis highs and the team will keep a close eye on it in the near-term. But, echoing the short-term vs long-term sentiment above, we still see significant growth potential on a three-to-five year view.

Swedish cash management business, Loomis, performed well last week after announcing details of a new product launch. Loomis Pay is an end-to-end payment system, designed to make life much more straightforward for it small-to-mid-sized merchant customers. The new product will require some investment over the next three years but Loomis forecasts that it could deliver more than SEK 3bn in additional annual revenues within five years, at an attractive margin. Clearly, there is execution risk in a product launch like this, but if successful, it has the potential to augment group profits by about a quarter.

Rightmove, the UK’s largest online property portal, is a core holding in the RWC UK Focus Fund. The team had a call with management last week to follow-up on the interim results released in August. Despite the economic uncertainty, the business is trading well and looks likely to have its best year ever. Activity in the UK housing market is at record levels and, even as lockdown restrictions are being reintroduced, the property market looks likely to remain open. At c. 30x next year’s earnings, the valuation looks rather attractive when compared to most other website businesses, particularly when one considers Rightmove’s attractive financial characteristics, strong brand and pivotal role in the UK’s housing market.

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