From QUAERO Capital European Equities team
European stockmarkets’ valuation remains reasonably attractive, with an aggregate rating at a level historically consistent with positive, low double-digit annualized performance.
Michaël Malquarti, manager of the Argos European Equities Long Short Equity strategy, believes European equity markets continue to point to a mid-term bullish picture from a technical standpoint.
The strategy aims to profit from pockets of market inefficiencies through the application of a systematic and objective investment decision process. By combining powerful value and momentum criteria, the model objectively preselects stocks that statistically offer an attractive performance potential.
Up to May, out of the selected stocks held constituting the long leg of the portfolio, 53% had a positive absolute price performance and 47% showed a price performance above that of the Stoxx 600 Europe index. Over the month, the top 10 performing stocks in the Long Leg rose by an average of +8.7%.
Amongst the best performers were Sacyr (+10%). The Spanish construction and concession group posted first quarter numbers marked by a 16% YOY increase in revenues and in EBITDA, and a 9% growth in backlog, supported by the recovery of the local economy.
German firm Hamburger Hafen und Logistik (+10%) increased its 2017 full year guidance in the wake of a satisfactory Q1 set of numbers that included a 9% increase in revenues and a 34% rise in net income, while CA Immobilien Anlage, the Vienna-listed Central European office real estate specialist, was up 8% and announced a 63% increase in its Earnings Before Taxes for Q1.
Conversely, the bottom 10 performers fell by 9.1% on average. The market was disappointed in steel and raw material share Outokumpu (-17%) despite a strong set of Q1 numbers, including a 10-fold increase in EBITDA. Swedish-based sustainable fashion click-and-mortar distributor Kappahl (-11%) was weakened by some profit taking after a very strong performance over the last year. Austria’s Wienerberger, a world leader in clay bricks and tiles for office and housing construction announced Q1 earnings hampered by seasonal adverse weather, but maintained its full year forecasts.
The stock selection for the European Equities Long Short Equity strategy is the result of a purely bottom-up analysis that exclusively relies on strict and objective financial criteria encompassing 1,700 western European companies.
As the result of this process, for the period covered, 56% of companies held had their roots in countries with AAA/stable sovereign ratings, according to both S&P and Moody’s (i.e. Denmark, Germany, Netherlands, Norway, Sweden, Switzerland). That is a significant overweight compared to 30% for the selected universe of European stocks as a whole.
These countries tend to be associated with companies that generally benefit from low funding costs, pro-business and stable regulatory and fiscal environments, better governance, transparency, and socially responsible practices, with a productive workforce and highly attractive domestic markets.
All these factors can be considered competitive advantages over the very long term compared with competitors based in less advanced countries elsewhere in Europe or in the world. Also, in the event that sovereign debt issues re-ignite in Europe, these companies would probably be less directly impacted than those based in less attractive countries.
From a thematic standpoint, the strategy continues to be geared towards companies benefitting from the digital automation mega-trend: 13% of the companies held benefit from the numeric and process automation trends, which is somewhat higher than the overall European stock market universe (10%).
Another theme for the strategy is clean technology: 9% of the strategy was invested in renewable energy and clean tech generally, a higher proportion than in the overall European stock market universe (6%).