How to protect your European portfolio and deliver Alpha
13 November 2012
European equity specialist Nicolas Walewski believes he has identified three types of businesses that can reduce downside risk in a portfolio without sacrificing returns.
This is a key consideration at Alken when screening for European stocks – the consumer and the financial pressure they are under and how that affects which stocks ultimately make it into our portfolios.
As a stock picker, I am focused on constructing a portfolio with quality stocks that have an endogenous ability to perform, regardless of the macroeconomic environment.
A notable driver for this approach, which is of particular importance at the moment, is the frustrating lack of visibility into ECB and sovereign government actions, which means my investment team is honing in on stocks that have a tangible edge over their peers.
Despite the encouraging signs we saw from European Central Bank (ECB) president Mario Draghi mid-summer as well as evidence of increasing productivity gains in key European countries, the evolution of the macro environment remains largely unknown.
Looking further afield, a mixed scenario: fuelled with doubts over the long-term structural situation of China, which may give us a break until Q1, yet promises to howl again due to its vast line of inefficiencies and bubbles.
The oil price at its current level will prove to become a hurdle and a burden for companies that have already started to feel the impact on their cost structures, and geopolitical risks still weigh against a reduction in the price of Texas tea.
Despite these woes and far from being mutually exclusive, you can achieve the objectives of protecting both investors’ equity portfolios in the current volatile and murky waters of Europe, while also delivering Alpha.
This aim has revealed three particular types of stocks that we at Alken believe can serve up this balance – oligopolies, low-cost business models and innovators.
Oligopolies enjoy strong pricing power, and reduced competition means higher sustainable profitability.
Take the Spanish company Grifols for example, a world leader in plasma proteins production.
The plasma market is consolidating and there is not enough capacity coming into it over the next five years to satisfy a demand growing at 6 to 8 per cent per annum. In addition, there are currently only three major players worldwide.
Structurally, Grifols is also better positioned than either of its two competitors to benefit from that growth.
Concerning the other two sides of this tripartite shield, it is clear to us that lower consumer spending, as is very much the case right now, favours companies operating at lower price points – Ryanair is an obvious and successful example here.
Lastly, innovation drives profitable growth even in tough environments – lesser-known tech companies that enjoy more flexibility and speed in their product development, for example.
It is of course important to mention our stance on the banks – overall, we continue to be underweight sectors that are macro-driven, highly regulated or leveraged.
Banks can be a particular sore spot, given their tendency towards short-term rallies, however we see little reason to change our stance given the lack of visibility on the sector’s balance sheets and their dependence on further stimulus packages, the occurrence of which remains uncertain.
Nicolas Walewski is a fund manager at Alken Asset Management. The views expressed here are his own.
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