Fundamental analysis and stock picking as important as ever in a volatile environment


Fund Commentary
23 Nov 2015


Following the severe summer correction, financial markets in Europe sharply reversed their trend in October and posted their best monthly performance since 2009 with the Fund’s benchmark, the Eurostoxx 600 Net Return posting a +8.08% return. Equity markets have been in a fairly unique configuration since mid-2011. On the one hand, sluggish economic growth impacts negatively EPS growth potential and, as a consequence, equity valuation multiples. On the other hand, the ever increasing global liquidity coupled with long dated interest rates “doomed” to stay low for an extended period of time are favorable for equity valuation multiples.

In this environment, the market moves upwards when the growth prospects of monetary policy are perceived positively as, needless to say, was the case in October. But when doubts arise about the effects of money creation on growth, or the ability to isolate external shocks such as the emerging slowdown in general and China in particular, risk aversion takes over – as was seen during the summer period.

In October, the Fund returned +5.59% hampered by the prudent approach adopted during the summer to preserve capital through an increased cash allocation. Tarkett was the most significant contributor to performance in October, followed by Tom Tailor and Saf-Holland. At the other end of the spectrum, Lisi, Mersen and 1000Mercis were the three main detractors from performance. 

A new position was initiated in October: SLM Solutions. Based in Germany, SLM Solutions operates in the promising metal 3D printing market, which is mainly focused on industrial applications. The vast majority of the industrial companies visited recently have put in place internal studies to introduce additive manufacturing as an additional/alternative production method. Some industries like aerospace, heath care, dental care, tyre manufacturers (moulds for winter tyres) are already in production with this new technology. A constant reduction of per-unit prices on the back of more productive machines and decreasing powder prices, allows for massive gains in specific industries (weight reduction, assembly cost reduction). SLM appears to be well positioned, both commercially and technologically, to benefit from strong underlying market growth. At the end of September 2015, order intake was up 111% versus 2014.

Financial markets in Europe have been very volatile recently and may continue to be as long as macroeconomic numbers fail to reflect an endogenous recovery. Despite some signs of positive trends in the leading indicators and increased competitiveness brought about by the weakness of the Euro, in Europe the unemployment rate is still high, there is meagre production capital spending and consumer confidence is highly dependent on exogenous factors such as the oil price or low interest rates. The impact of the monetary policy initiated by the ECB on the real economy is still uncertain. In such an environment, the Investment Adviser believes that fundamental analysis and stock-picking becomes more important.

The views and statements contained herein are those of Pascal Investment Advisers SA in their capacity as Investment Adviser to the Fund as of 16/11/15 and are based on internal research and modelling.