DNCA Value Europe

European value equities

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

Copier le code ISIN

Portfolio managers comments | October 2018
October 2018

October was affected by a plunge on global and European equities markets. Despite a slight uptick over the last days of the month, the Stoxx 600 dropped 5.6% (-7.1% YTD) penalized by fears of a slowdown in global growth (downgrade to IMF prospects, disappointing PMI indicators in Europe and China, despite high absolute levels), the obscure rhetoric over the US-Chinese trade dispute, geopolitical tension, the Italian budgetary crisis, the deadlock in Brexit negotiations, the weakness of the German coalition and an increasingly restrictive message from central banks.

Quarterly publications...

October was affected by a plunge on global and European equities markets. Despite a slight uptick over the last days of the month, the Stoxx 600 dropped 5.6% (-7.1% YTD) penalized by fears of a slowdown in global growth (downgrade to IMF prospects, disappointing PMI indicators in Europe and China, despite high absolute levels), the obscure rhetoric over the US-Chinese trade dispute, geopolitical tension, the Italian budgetary crisis, the deadlock in Brexit negotiations, the weakness of the German coalition and an increasingly restrictive message from central banks.

Quarterly publications were generally mixed and did nothing to calm matters. Numerous profit warnings, primarily focused on German groups and the auto sector, did not help sentiment. Investor concerns over the lasting nature of margins in a backdrop of widespread cost inflation remained intact, despite the fairly confident messages from companies concerning their ability to pass on these increases. If it is maintained, the recent fall in oil prices to below $80/b could nevertheless provide a source of relief in coming months.

In this uncertain backdrop, European defensive and yield sectors were favored rather than cyclicals, with telecoms at the top of the list.

DNCA Value Europe was down -4.98%, outperforming the benchmark index by 55bp. The portfolio is trading on a 2019 P/E multiple of 11.47xx, net debt of 1.2x EBITDA and a return of 4.1%. The fund was underpinned by its exposure to telecoms and health stocks. Elsewhere, its low relative weighting in the banking sector (8.4%) was fairly welcome during October.

We made few changes to the portfolio during the month. The main contributors were Deutsche Telekom (+4%), Novartis (+4%) and Fresnillo (+4%). Among the main negative contributions were Wacker Chemie (-27%), Ceconomy (-26%) and Babcock (-15%).

The weak performance by Wacker Chemie was due to disappointing Q3 earnings, affected by start-up costs for a new polysilicon plant and by extremely low selling prices in the division, following changes to solar energy subsidies policies in China. We believe that profitability in this segment has reached a low point and are fairly confident in a rebound in 2019. Elsewhere the Silicons division is robust and the Polymers division should restore pricing power.

Ceconomy was down 26% following a second profit warning in less than one month. The renewal of the entire top management team following this fresh disappointment should accelerate the Group's restructuring whereas the share is trading at just 0.09x sales and a 6% yield.

Isaac Chebar - Don Fitzgerald - Julie Arav - Maxime GenevoisText completed on 5 November 2018