European active funds shift allocations to staples and utilities

During June, the Fund reported a loss of -1.09% on an absolute basis, with the Fund’s benchmark ending the month down 0.63%. Takeaway.com was the largest monthly contributor to the Fund’s performance, followed by Spie and Elis. Takeaway.com acquired the operations of Delivery Hero in Switzerland during the period, combining the 2nd and 3rd largest players in the country and making the Company a close challenger of the country’s leader, Eat.ch.

Monthly Fund Commentary
24 Jul 2018

During June, the Fund reported a loss of -1.09% on an absolute basis, with the Fund’s benchmark ending the month down 0.63%. Takeaway.com was the largest monthly contributor to the Fund’s performance, followed by Spie and Elis. Takeaway.com acquired the operations of Delivery Hero in Switzerland during the period, combining the 2nd and 3rd largest players in the country and making the Company a close challenger of the country’s leader, Eat.ch.

In spite of the anecdotal size of this transaction, rumoured to be around €1Mio, the stock reacted very favourably as it was seen as a prelude to a much larger, and long awaited, transaction between the two companies with regards to their German operations. Spie and Elis both rebounded in June on the back of reassuring comments by brokers following the companies’ participation in several broker conferences.

At the other end of the spectrum, Saf- Holland, Ferronordic Machines and Brembo were the three main detractors. Saf-Holland and Brembo suffered mostly at month end with the resurgence of the threat of a trade war and its potential impact on the automotive industry. Ferronordic, which had been the largest contributor in May, gave back part of its gain in spite of positive news, regarding the lifting of import duties for some of its main competitors in Russia.

The biggest issue facing stock markets this year, in the Investment Adviser’s opinion, has not been a deterioration of fundamentals, but a normalisation of investor sentiment that was excessively bullish in January. This said, the team now believe investor sentiment to have reverted towards excessive bearishness. As BNP Exane mentioned in a strategy note published on 13th July, “all three of positioning indicators (fund flows, hedge fund beta and cross-asset risk), from a contrarian perspective, are now at levels that have marked important opportunities to buy the stock market in the past (e.g. Feb 16, Aug 12, Oct 11, March 09).”

According to the Investment Adviser, the de-risking is particularly evident in Europe with European active funds now capitulating on their overweight allocations in Financials, Energy and Discretionary, while adding to Staples and Utilities. As a result of this, the disparity in stock valuations has now reached extreme levels. Value stocks in Europe have been de-rated to levels seen in the immediate aftermath of Brexit, at a time when European economic data surprises are turning more favourable. Moreover, EPS upgrades continue to be widespread. Therefore, barring a further escalation in trade rhetoric, the Investment Adviser anticipates that a swift rotation back into value stocks, similar to the behaviour experienced during the latter half of 2016, may be forthcoming. The chart on the left-hand side from Goldman Sachs is a perfect illustration of the above.

Source of graph: FactSet, Goldman Sachs Investment Research.

The views and statements contained herein are those of Pascal Investment Advisers SA in their capacity as Investment Adviser to the Fund as of 13/07/18 and are based on internal research and modelling. Please contact info@eisturdza.com should you wish to have an update call with the investment team.