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Strong European returns unlikely to continue
The tremendous rerating of European stocks during 2013 meant value investors saw big moves in many of their core holdings. As a result, they now have to hunt in more obscure places to find cheap assets, and warn that returns from current levels are likely to be less than spectacular.
“Stocks in Europe offered extraordinary value over the past two years,” says Wilhelm Hertzog, one of the portfolio managers of RECM’s Global Fund. “Once investors began to realise that Europe wasn’t about to implode, stocks rerated tremendously.”
Hertzog explains that this rerating drove the fund’s move out of several core holdings. “Shares like French retailer Carrefour, as well as Greece’s Titan Cement and Hellenic Exchanges, reacted strongly to the faintest glimmer of improved business conditions. One of our top sales during the last months of 2013 was Portuguese retailer Sonae, a share we only started acquiring late in 2012. That tells you something about the speed with which certain shares moved in Europe,” says Hertzog.
A focus on identifying high quality companies trading at a deep discount to their intrinsic value means research teams need to continue to unearth new ideas around the world. They have to look harder and in more obscure places to find cheap assets than was the case a year or two ago.
He says that the largest purchase by far in the last six months has been Japanese oil and gas producer, Inpex. “Investors are shunning the oil and gas sector – they don’t like the capital intensity of the industry. Inpex stands out as the cheapest of its peer group, particularly given the rising project costs in the massive Ichty’s offshore project in Australia.”
Hertzog urges investors to temper their return expectations. “It’s very rare that the intrinsic value of companies will increase at the rate that global share prices increased in 2013. Long-term returns from these levels should be solid, but we’ll be surprised if they’re spectacular,” warns Hertzog.