Volatility providing fertile ground for stock pickers

The Fund gained +0.86%* during October, taking year to date performance to +16.91%*. October was another real roller coaster of a month, consistent with much of 2019, with continued uncertainty and noise concerning issues such as trade war discussions, Brexit and impeachment rhetoric. We also entered the crucial Q3 reporting season: always tricky when there is little visibility.

Monthly Fund Commentary
19 Nov 2019

The Fund gained +0.86%* during October, taking year to date performance to +16.91%*. October was another real roller coaster of a month, consistent with much of 2019, with continued uncertainty and noise concerning issues such as trade war discussions, Brexit and impeachment rhetoric. We also entered the crucial Q3 reporting season: always tricky when there is little visibility.

So far, companies in Europe are on average beating consensus estimates, although the bar has been set low in absolute terms and it seems that Europe maybe heading for an earnings recession. This general picture however masks the diverse fortunes within companies and sectors, which have become fertile ground for volatility and for stock pickers looking to capitalise on stock price swings.

Bank of America strategists say that stocks surpassing their earnings consensus have beaten the market by 3% on average over the period, while those that have missed lagged by 3% – the biggest spread in a year. Crucially, while the number of profit warnings so far is in line with last quarter, these have been the “least punished” since 2015, they add. Certainly, a signal that expectations, at least for 2019, had been rebased prior to the Q3 reporting season.

With the exception of SAF-Holland, detailed in the September letter, the portfolio’s holdings reported solid results for Q3, some of them, such as Ipsos and Brembo even increasing their annual expectations.

Valmet was the largest monthly performance contributor, followed by Trigano and Ferronordic Machines. Boozt, Albioma and Mauna Kea were the three largest detractors.

Valmet proved with its Q3 results that the quarterly volatility in earnings experienced in Q2 (and detailed in our July letter) was nothing structural. Valmet’s Q3 results removed the two key fears that have hit the share price since the Q2 report, i.e. earnings leverage potentially having weakened, and the services business potentially entering a longer cyclical slump. Post a sizeable beat in order intakes in Q3, the order book is at an all-time high and Valmet is already set for a very strong 2020.

Trigano was one of the key detractors last month for what the Investment Adviser sees as one-off events. More positive news flow around the Brexit situation helped alleviate one of the main concerns around this investment, even though the UK only represents 12% of the firm’s revenues. As a result, the stock price has now almost recouped its entire September downward movement. As mentioned above, volatility creates opportunities and has enabled the Investment Adviser on this occasion to significantly increase the Fund’s position size at very good levels.

Ferronordic Machines’ stock price reacted positively post announcements about the company’s entry into a new market, Germany, which is rightly perceived as far less volatile than Russia in terms of market and earnings developments, hence deserving a higher valuation multiple. Ferronordic Machines is a Swedish listed construction equipment supplier.

On the detractors’ side, there is nothing to be reported about Boozt and Albioma. Mauna Kea continued to suffer, as it did in September, from a selloff in medtech/biotech names across the European markets.

 

* For detailed performance information based on complete 12-month periods since inception, please refer to the Fund page.

The views and statements contained herein, including those pertaining to contribution analysis are those of Pascal Investment Advisers SA in their capacity as Investment Adviser to the Fund as of 12/11/2019 and are based on internal research and modelling.