As bipolar markets continue to trade off news headlines, rotating between defensive, “bond proxy” names and cyclical stocks that will benefit from a higher-yield, inflationary environment, it increasingly ignores those equities whose growth is somewhat removed from the binary macroeconomic swings and the reactions of central banks. This is setting up a rich hunting ground for stock-pickers, as some of Europe’s compelling growth stories are ignored. Our preference is to take conviction positions in high-growth mid-cap names, which are trading on attractive valuations and with exposure to themes that will drive revenue and earnings growth over the next few years. – Tim Crockford, European Equities Portfolio Manager
Tim Crockford, European Equities Portfolio Manager at Hermes Investment Management, identifies long-term growth opportunities in Europe.
Europe has 17 exchanges, a market capitalisation of €13,589 billion and represents 19% of the world’s listed companies. This is a universe of extraordinary diversity and presents an abundance of long-term growth opportunities.
Yet unprecedented central bank policy is driving investors towards an increasingly narrow range of companies considered to have more predictable earning patterns, such as consumer staples. This is causing valuations to rise – creating a premium on these so-called “bond proxy” names. It is also setting up a rich hunting ground for stock-pickers, as some of Europe’s most compelling growth stories are ignored.
We believe there could be further gains in the bond proxy names, for as long as central banks are able to drive down yields further from already low levels, but our preference is to take conviction positions in high-growth mid-cap names trading on attractive valuations and with exposure to themes that will drive revenue and earnings growth over the next few years.
The most recent potential growth gems we have added to the portfolio encompass the fast-expanding world of E-Sports, smart warehousing and digital communications. These are mid-sized companies undervalued by the market, but creating strategic platforms for strong future cash-generative growth.
A big name in the global video game market, Ubisoft has a number of block-buster franchises, including Assassins’ Creed, Rainbow Six and Splinter Cell. While it has been relatively slow to embrace digital sales, this is now being overhauled. Moving away from one-off product launch strategies, Ubisoft is flattening out its revenue profile by producing new levels and additional downloads for gamers, allowing the company to harvest more revenue for each gaming franchise.
It is also looking to build its presence in the world of E-Sports which has caught the gaming industry by storm. E-sports is the popular name for organised gaming between competitive gamers. These players, who can command £1 million salaries, are often watched by football stadium-sized crowds and huge digital audiences. Advertisers and sponsors are taking notice, and this will bring greater revenue streams.
With a 6% free-cash flow yield, Ubisoft is currently an M&A target, but the valuation looks attractive on a long-term standalone basis when you consider the opportunity for high organic growth, expanding margins and its status of one of the big players in a rapidly expanding world.
Freenet is the largest network-independent supplier of mobile communications services in Germany. Increasingly, however, the company is looking to position itself in the digital lifestyle field as a supplier of internet-based applications.
Its share price had been beaten-up due to negative sentiment on a spate of recent acquisitions. However, we believe the market has underestimated the strategic importance of these investments and failed to recognise how they will create a new platform for growth that could have a transformational effect on the company.
Firstly, it has acquired the Media Broadcast Group, the sole commercial provider of DVB-T2 and DAB+ in Germany. This gives the firm a monopoly over the German terrestrial TV signal. Secondly, its stake in Exaring provides the solution for all types of mobile, video and television entertainment.
Exaring owns a super-fast fibre-optic network, technically capable of reaching 23 million households in Germany to deliver a complete range of digital video options. Finally, it took a stake in Sunrise, a Swiss telecommunications company. This was more of an opportunistic play, as Freenet seeks to take advantage of the strong cash-generative nature of the firm and the potential for consolidation in the Swiss mobile market.
Another firm we believe has been overlooked by the market, despite its strong share price performance of late, is German forklift-maker KION Group. Its capability in warehouse automation systems for distribution giants such as IKEA and Amazon has the potential to fuel further earnings growth for years to come.
The company has already enhanced its automated systems capabilities by acquiring Egemin Automation and Retrotech. But it will further bolster its market position with the addition of Dematic to its portfolio of brands and establish itself as the leading innovator in e-commerce and intralogistics, managing the flow of materials through customers’ warehouses.
Learning from Lehman - eight years on, how have we changed?