DNCA Value Europe

European value equities

FR0013294303 (Share N) FR0010524389 (Share E) FR0010884361 (Share I) FR0010058008 (Share C)

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Portfolio managers comments | December 2018
December 2018

The months go by and uncertainty remains. The much-awaited year-end rally did not take place, with European (and US) indexes hitting fresh record lows during December. The Stoxx 600 Net Return plunged 5.46% to end at -10.3% over the full-year, still penalized by fears of a recession, maintained notably by a weakening in economic indicators in the eurozone and in China, and the US-China trade war. The ongoing fall in oil prices (now below $60/b, despite an OPEC agreement on production), political uncertainty (postponed vote on Brexit, conciliation on Italian budget, social crisis in France)...

The months go by and uncertainty remains. The much-awaited year-end rally did not take place, with European (and US) indexes hitting fresh record lows during December. The Stoxx 600 Net Return plunged 5.46% to end at -10.3% over the full-year, still penalized by fears of a recession, maintained notably by a weakening in economic indicators in the eurozone and in China, and the US-China trade war. The ongoing fall in oil prices (now below $60/b, despite an OPEC agreement on production), political uncertainty (postponed vote on Brexit, conciliation on Italian budget, social crisis in France) and the confirmation of a tightening in monetary policies (end of QE in Europe and 4th rates hike by the FED), strengthened negative sentiment. In view of the widespread pessimism, market liquidity narrowed and volatility increased.

With the quarterly earnings publications barely finished, corporate newsflow was just as rife with fresh profit warnings (Ceconomy, Asos, Fresenius SE and BPost). In sector terms, the performance gap between European defensive and cyclical sectors was not as wide as in the two previous months. Commodities and utilities posted the best index performances, while automotive, bank and retail stocks underperformed substantially.

The plunge in multiples was harsh in 2018, even though analysts' forecasts for earnings growth at European companies remain positive, despite the numerous risks set out previously. Like 2018, the first few months of 2019 are unlikely to be easy...

DNCA Value Europe was down -6.95%, underperforming the benchmark index by -150bp. The portfolio is trading on a 2019 P/E multiple of 10.85x, net debt of 1.4x EBITDA and a return of 4.14%. The main contributor was Fresnillo (+13%). Among the main negative contributions were Kingfisher (-18%), Société Générale (-14%), Nexans and Ceconomy (-13%).

We made a number of changes to the portfolio during December. Despite unsatisfactory performances, we sold off our positions in Ceconomy (fresh profit warning, little progress concerning strategic initiatives, a lasting conflict with the minority shareholder, expected nomination of a new CEO and CFO) and Telecom Italia (departure of the CEO who we considered capable of turning around the company with an acceptable plan, strategic vagueness and a still opaque and uncertain governance with clear disagreements between the two main shareholders). We also sold off the remaining stock in Aperam (sluggish macro-economic backdrop and rising competitive pressure affecting prices and volumes), with the company belonging to the portfolio since 2014.

We also built a position in Enel, which in our view benefits from a solid and visible growth profile (strategic plan for 2019-21 focused on renewables and infrastructure, to the detriment of activities exposed to volatile commodities), a robust balance sheet, an attractive dividend policy and high-quality management. The share is trading on 2019 EV/EBITDA of 6.9x, with a yield of 5.5%, which is set to grow by 10% a year.

Isaac Chebar - Don Fitzgerald - Julie Arav - Maxime GenevoisText completed on 2 January 2019