Market Review
After a tumultuous start European markets finished the month up +1.03%. The Fed’s modest first tapering step was well received by investors. Bernanke managed to convince markets that the trimming of bond purchases would be gradual, ending Q3 2014, and was not synonymous with rising short term rates. Rates would not be raised until unemployment declines below 6%. The sector trends were no different than for the previous months with cyclicals outperforming both defensives and commodities. The Fund gained +0.8% in December (EUR / B shares), slightly underperforming the Stoxx Europe 600 TR Index. Best contribution to performance stemmed from Pirelli (+10.9%), Sika (+6.5%) and Maersk (+5.7%). Major detractors were Lundin Petroleum (-8.1%), Sonae (-4.8%) and Vienna Insurance Group (-6.2%). The Portuguese food and non-food retailer Sonae suffered somewhat following speculations of a detrimental increase in VAT rates. The 20% undervaluation of Sonae to its sum of the parts gives us a sufficient security margin as we expect private consumption trends and real estate investments in Portugal to improve from very depressed levels. We are confident about the rerating potential of the share and it remains in our Top 10. For Lundin the Johan Sverdrup field update was a disappointment, nevertheless we still see strong value support for the company considering its very solid balance sheets and interesting exploration pipeline.
The Fund closed 2013 with a performance of +12.7% compared with +20.8% for its benchmark. Our quality bias towards structurally sound companies whose growth should outperform the market was not a recipe for success in an environment largely favoring leverage and price momentum. As sectors like banks, insurance and telecoms have rerated strongly and value becomes increasingly more difficult to find, we would expect quality stocks to slowly come back in focus.
Positioning and Outlook
In Europe downward revision for consensus earnings since the start of the year has been in the order of -15%. Earnings growth has ended the year in negative territory once again with expectations now at -1.3% for 2013. Nevertheless earnings multiples have continued to rerate, with European market multiples improving further from 11x to 13.6x. By historical measures valuation is now in neutral territory. But from these levels rerating without earnings momentum becomes clearly more challenging which should make 2014 a year of stock picking. In any case unconventional monetary policies by central banks will continue to be in focus in 2014 and keep markets aholding their breath. Our base scenario for Europe is a mild recovery from depressed levels with companies experiencing positive operational leverage. The absence of positive triggers from the credit cycle is an issue, nevertheless companies are cash rich enough to increase spending and reignite the capex cycle if they so whish. All in all a reasonable backdrop for 2014 to be a solid year for European equities. We take this opportunity to thank you all for your confidence!
