21st September 2015
Despite a sharp sell-off in European markets over the summer period, the fundamentals for many companies remain the same, according to Tim Crockford co-manager of the Hermes Sourcecap Europe ex-UK fund.
The manager believes now is the time to be carefully selecting opportunities rather than exiting the market, after a period of indiscriminate selling, below he explains why…
For us, the biggest surprise of the summer sell-off was the extent to which the market was caught off guard by China’s currency devaluation – which served as an admission that all was not fine. For a number of years, we have been factoring in the slow-down of the China growth engine, which will negatively affect export-led companies dependent on Chinese demand, such as luxury goods manufacturers and automakers. However, we have been focused on the resurgence of the domestic European economy, which is being driven by domestic consumption, taking up the slack from the decline in exports to emerging economies.
The indiscriminate selling of European equities has created a window of opportunity for bottom-up stock pickers in companies whose share prices have been dragged lower by little more than negative sentiment. While it is impossible to pinpoint the end of this volatile period, and emerging woes will no doubt continue to take their toll on European equities, for selected stocks, it is time to start to capitalise on this volatility, rather than run for the hills.
Below are some of the stocks we have been adding to, which continue to have a strong fundamental earnings outlook, but have been victims of indiscriminate selling:
Gamesa is a world leader in the development, construction and sale of wind farms. Historically, renewables manufacturers have been unattractive due to intensive capital costs and heavy reliance on government subsidies. However, wind energy has edged closer to parity with conventional energy sources over the last few years, and governments remain keen to diversify their sources of power generation for security. Sentiment has been hit by the emerging markets sell-off as well as the oil price performance which many investors see as linked, but the company continues to see an increase in orders from its major markets. Particularly in India, the company’s most important growth market, the government is actively diversifying its energy base away from imported fossil fuels, with particularly aggressive renewable energy targets. It hopes to increase wind generation capacity to 60 gigawatts per annum by 2020; usage currently stands at 25 gigawatts. The Indian government should continue to prioritise renewable energy, and with a share of over a third of the Indian market, Gamesa stands to benefit.
Legrand’s margins are much higher in domestic Europe than in any of its other markets, so any sustained pick-up in Europe should support a pick-up in earnings. The company continually refines its product offering, while expanding into the US organically and in the Far East by acquisition. As the company increases its market share in these regions, so too is its pricing power increased, as retraining acts as a barrier to their electrician customers switching to other brands. While Asia will continue to be important to Legrand’s longer-term growth prospects, an improvement in its European markets should mitigate any near-term slowdown.
Cerved Information Solutions
This is another stock we added to after the August sell-off. As the leading credit information supplier in Italy, Cerved sells credit data analysis reports to financial institutions and increasingly, corporate customers. The business model is hugely attractive: with a primarily fixed cost base, the company’s credit information division makes 85c on every euro of additional sales, and sales volumes are starting to pick-up with Italian loan growth improvements. Their scalability is matched with impressive free cashflow generation, with conversion rates of over 80%, putting them on a free cashflow yield of 6%.