Forget macro matters – focus on finding growth

While macro events often grab the attention of the investment community, Martin Todd & Chi Chan, European Equities Portfolio Managers at Hermes Investment Management, believe fundamentals will always remain the major determinant of returns.

Equity investors have always had to contend with macro event influences on stock markets. Europe has been no stranger to major episodes in recent times – such as bailouts, elections, referendums and unorthodox monetary policy actions.

Stock markets are good at shrugging off these occurrences, but often these events have the ability to grab the attention of investors and influence behaviour.

While macro matters can be significant for markets, accurately positioning a portfolio in anticipation of any single scenario is both difficult and risky. The recent UK referendum is a prime example of this. A ‘Remain’ vote was widely anticipated by investors, and bookmakers alike, so any temptation to allocate to stocks with this outcome in mind would have resulted in swift and severe downside when the Brexit vote was delivered.

In Hermes’ approach to European equities, we take a longer-term view. We seek to identify companies able to consistently produce growth, irrespective of the macro environment. Given the uncertainties in financial markets currently and the increasing scarcity of economic growth, we believe our approach can capitalise on current market conditions.

We continue to be biased towards companies with high barriers to entry and beneficiaries of structural trends. These companies have pricing power and should continue to deliver growth regardless of any macroeconomic conditions or events.

For example, we believe the world is becoming more interconnected, which will therefore boost the demand for high-tech microchips. Japanese tech giant SoftBank obviously shares this view, with the company recently agreeing to buy one of our long-held positions, ARM Holdings, at a strong premium.
The identification of long-term structural growth trends is where we feel we can gain a competitive edge for our investors, because these changes tend to be more persistent than the market gives credit for.

We are currently witnessing a number of strong long-term growth stories across many different sectors, for example in stocks we own such as Adidas, Gamesa and GlaxoSmithKline. The recent earnings season validated our thesis on each of these positions.

Adidas’ turnaround is in full force and delivering strong growth in earnings. The global ‘Ath-leisure’ clothing space continues to grow rapidly, not only in emerging markets like China, but also in the developed world. Two years ago, Adidas faced several major issues, including market share loss to Nike and Under Armour, which resulted in a profit warning. Its restructuring and refocusing has paid off, with a return to favour with consumers and market share gains. The German giant has so far been our top performing stock of 2016.

GlaxoSmithKline, a company derided by some investors in the past, is starting to turn the corner. The pharma group is currently on track to deliver earnings growth of about 12% this year, that is before the major currency translation kicker provided by the collapse in sterling. Glaxo was another stock to surprise on the upside during the recent earnings season, aided by double-digit growth in both consumer and HIV franchises.

Another strongly performing stock this year has been Gamesa. The Spanish wind turbine manufacturer has seen EPS forecasts rise 50% over the last 18 months, testament to its impressive growth. The impending merger with Siemens’ wind division will create the global market leader, with strength in both onshore and offshore technology. Climate change concerns ensure considerable growth for the renewable energy industry for many years to come.