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Euro Stocks Are Cheap

September 10, 2012 | About:
Ignacio Pedrosa

Ignacio Pedrosa

Markets are set to continue to be characterized by high volatility in the next few months, during which the European Union will have to face making some stark key decisions in relation to the future of the entire European project. We do feel, however, that this uncertainty has already largely been priced into the valuations of the quality European stocks. These are very attractively priced in the market, both in outright terms, with our EDM Strategy Fund P/E ratio at 13.8x bordering on a historical low, and relative to their U.S. counterparts (see chart).

1527086982.jpg For these reasons we think that now is an excellent time to either take on or step up exposure to Europe. Although the high levels of volatility do call for exercising great care in stock-picking, which is the essence of our EDM Strategy fund.

Over the last few months, profit forecasts for European countries as a whole have been substantially downgraded due to the sharp decline in the zone's economic climate. Most notably, estimated profit growth for 2012 was lowered by -5% in the last quarter and negative growth is now predicted for the year.

Against this backdrop, the companies in the EDM Strategy fund have once again managed to buck this widespread trend. Second quarter results underline the solidity of the companies the fund comprises and have been a key factor in underpinning its healthy performance. In the wake of the reporting season for second quarter results, we are standing by our forecast of profit growth for our companies in 2012 of +9%. This fine display by them can be explained to a large extent by their international exposure, with virtually half of sales in the United States and Emerging Markets.

That said we are still holding companies in the fund that are highly exposed to Europe, yet which manage to counter the generally negative trend thanks to the essential distinguishing features of the business segments in which they operate. An example of such resilience is Coloplast, a market leader in stomata solutions and continence. 72% of its revenues come from European markets, but even so in 2012 it should see organic sales growth of 6% and a surge in EPS of +20%. The company embarked on a process of offshoring its factories in 2002 from Denmark to Eastern Europe and China, which has led to ballooning margins.

In the pharma sector, Roche (ROCM) reported sound results and confirmed its targets for 2012 as a whole. Although the sector is not going through the best of patches, Roche should stand to benefit from its robust portfolio of commercialised products, the ample time before its patents run out and the huge potential of its products undergoing development.

On the other hand, services outsourcing company Capita (CT) has managed to boost sales by 15% in the last half and EPS by more than 10%. The British company has healthy medium-term levers for growth and will also profit from a revival in contract awards in the coming months.

Our investment philosophy means we endeavor to pick out companies with sustainable earnings and a high degree of transparency in their dealings, in other words businesses with the least possible cyclical influence. For this reason our exposure to the chemicals sector may come as an initial surprise to investors. Our investments in this sector, however, revolve around two stocks: Air Liquide (AI) in the industrial gases sector and Brenntag (BRE), which distributes chemical products. Despite their ties to an ostensibly cyclical sector, they exhibit a great ability to withstand the frail economic environment thanks to their business models and their niche markets. Both companies are highly diversified in terms of sector and geography and are reaping the rewards of the trend among their customers of outsourcing the services they each offer in a bid to cut costs.

Generally speaking the results for the companies in the fund have been positive, although we have had the odd disappointment, such as with Straumann. The Swiss dental implants company has been adversely affected by the weakness of the European economy, which it has not managed to make up for through the buoyancy still displayed by the US market. In spite of this, the business's long-term fundamentals remain unscathed and Straumann is the best-placed of companies, as it has made the most of balance sheet strength during the crisis to cement its status as a sector leader.

As regards changes within the fund, positions have been scaled up in Brenntag, DSV and Kuehne&Nagel, whereas exposure to SAP has been marginally reduced following its strong run. In excess of 94% of EDM Strategy's assets remain invested.

EDM Strategy Fund has performed very positively in 2012, keeping assets intact and even showing high-digit gains in times of marked volatility and losses across the board in markets. The fund even managed to slightly outperform the Stoxx 50 in the last two months of rallying stock markets. Proof of this fine showing was the +13.7% overall cumulative return for EDM Strategy in 2012, far outstripping the figure of +5.8% for the European index.

View the fund’s presentation:

Best regards,

Beatriz López

Fund Manager-Partner

Rating: 3.0/5 (15 votes)


Patsyluck premium member - 1 year ago

With an annualised 1.5% return since 2000 and a total expense ratio of 2.79%, it seems EDM have done better than their investors.

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