Investment Strategy 2014
2013, a last look back
Only emerging markets were lagging in 2013, whereas the US and European markets ended the year on very positive notes (+18% for the Eurostoxx and +29.6% for the Standard & Poor’s). Investor interest returned to the euro zone with long-neglected value investments taking precedence over growth stocks. Europe was no longer feared and in bond markets, debt in southern countries saw yields converge with those in Germany. 2013 was a truly good year and a dream for all European and US investors, providing performance and very low volatility (the deepest decline on the US market did not exceed 6% during a year in which the index gained 30!)
2014, maintaining the pace?
At the risk of discouraging readers, 2014 is set to be more complicated than 2013 with performances expected to be less spectacular and more uneven. This caution is not to be blamed on a negative vision of the macro-economy. On the contrary, 2014 should enable the US to restore growth of 3% and the world as a whole, to restore a pre-crisis growth rate of 3.6%. The most difficult period of budgetary adjustments is behind us and from a growth perspective, 2014 should be the first year of a return to normal since the crisis in 2008.
So why this slightly more cautious tone? In order to answer this question, let’s have look at both the woods and the trees.
The woods provide an aerial view, that of central banks. After a year under the “all-accommodating” sign during which the FED and the Japanese and European central banks relentlessly injected liquidities, December 2013 was a turning point: the US central bank slowed its asset buyback programme. Admittedly, the Japanese and European central banks are set to maintain their beneficial bias for the markets, but the FED’s policy has modified asset prices so much that the change in its policy cannot fail to have an impact. The change in asset prices has already started: long-term rates are recovering and should remain on this trajectory in 2014. The increase should go ahead at a measured pace and with swings that we should make the most of. Our credo for bonds in 2014: corporate bonds with active management of exposure to long-term rates. Given that European convergence is set to continue, we will maintain this stance in southern Europe. We have entered BANCO ESPIRITO SANTO and GESTAMP into diversified portfolios.
Concerning equities, shares in emerging markets with a current account deficit are set to remain under pressure initially and the euro zone steered by Mario Draghi remains our preference. However, at the same time as this short-term reading, let’s take a step back and not forget emerging markets for too long: high growth throughout the world should quickly benefit these regions that are very sensitive to the economic cycle. 2014 should offer us entry points in these markets that are currently discounted.
In contrast, after two attractive years of growth, European markets are trading on higher multiples than their historical average levels (average P/E of 13.4x in Europe compared with an average of 11.9x over the past 10 years). After these clear uptrends a period more dependent on stock-picking than the global trend is likely to follow.
And now time for the trees…
Which ones should we choose? The tremendous rotation in value/growth stocks has not yet finished and our investments are now fairly well balanced between the two styles. A return to normal valuation levels, changes in status (and often governance) are, in our view, signs for us to revisit neglected companies. THYSSENKRUPP, the German conglomerate that was poorly managed for a long time, belongs to this category. The reopening of longstanding dead-ends in sectors ranging from telecoms to utilities is continuing. ORANGE and RWE are now heavyweights in Echiquier Value and Agressor. Finally, after suffering harshly in 2013, the oil services sector offers attractive entry points: SAIPEM and GROUPE BOURBON are strong convictions for 2014.
We are nevertheless not neglecting the growth universe. In 2013, the slowdown in emerging markets and currency depreciation in these countries prompted casualties not only in these markets, but also among the European champions. Among these, major luxury groups such as KERING and food and beverages companies highly exposed to emerging markets such as UNILEVER, seem to have returned to buying prices.
Finally, since Europe is picking up with a slight delay and at a slower pace than in the US, we believe the time has come to renew exposure to the European cycle. From heavyweight players such as SCANIA to niche market equipment makers such as SAF HOLLAND, investment ideas are not lacking for Echiquier Major and Echiquier Agenor.
Stronger growth, a universe still clearly steered by central banks, a return to normal – and therefore more demanding – valuation levels, it is with these three ideas in mind that we are starting 2014.