Experts from Trea Asset Management, an independent asset manager specialising in management mandates for financial institutions, recently explained at a conference in Madrid their view of the economy, and the recommended positioning for investors, with a particular focus on Spanish and European equities.
Coronavirus: curbing production
The first issue they addressed was the impact of the coronavirus, which has caused sharp falls in stock markets, spreading fear among investors. In their view, the biggest consequence of the epidemic is the sharp brake it can produce on demand, paralysing the supply chain, and emptying business inventories.
This scenario would be very dangerous for the economy, because it would reduce corporate profits, and would entail high costs for restarting the productive machinery. Because the later the coronavirus is brought under control, the later production in companies will be reactivated, at a higher cost, and the greater the risk of an economic slowdown.
From the investors' point of view, this situation can generate investment opportunities, given the increase in volatility. Proof of this is the Ibex's falls of close to 8% in just three sessions, which have left many stocks with good fundamentals at attractive prices. Particularly in sectors related to the supply stoppage: airlines, automobiles, textiles, industrials, etc.
Investment environments in Spain and Europe
The current macro scenario in Spain and Europe corresponds to the end of a bullish cycle that is taking too long, supported by monetary stimuli and high indebtedness.
In Spain, passive management (replicating the performance of the indices through ETFs or other assets) has grown strongly, thanks to the fact that it is much cheaper to manage, and that the continuous rises in the stock market (the Ibex up 70% over the last ten years) have brought returns without any effort. As a telling fact, only 4 Ibex stocks have been responsible for the 12% rise in 2020, excluding the last phase of declines due to the coronavirus.
However, the passive management boom has led to a concentration of liquidity in stocks included in indices, and a liquidity shock in those excluded, especially small and medium caps. These stocks, despite being supported by good fundamentals, have suffered from investor indifference and therefore have a high potential upside as prices have fallen sharply. Given that corporate earnings remain positive, this represents new investment opportunities.
The ESG (socially responsible investment) factor has reinforced the effect of passive management, rewarding companies that are environmentally sustainable, transparent and with good governance, as opposed to other companies in demonised sectors such as coal, for example. Investors are increasingly taking ESG into account in their portfolios, which also encourages value styles (companies that have good, solid businesses but are undervalued by the market).
As for Europe, political uncertainties such as Brexit, the trade war between the US and China, and the impact of increased regulation, especially in the banking sector, have been a drag. As a result, the American stock market has risen more than the European one, thanks to higher economic growth, better corporate earnings, and monetary stimulus.
Where to find value in Spain and Europe
Taking this scenario into account, the experts at Trea Asset Management identified a series of investment opportunities in Spanish and European equities. Thus, they opt for sectors of the future in which governments are investing: everything related to the preservation of the environment, connectivity (smart grids), health and the ageing population, as well as pharmaceutical companies.
They also see value in utilities (energy companies such as electricity, natural gas, etc.), especially in renewable energies such as wind and photovoltaic. They highlight the potential of railway infrastructures, a sector whose impact on the environment is low compared to other more damaging sectors such as aviation, automobiles and shipping.
Finally, disruptive technology companies (electric cars, digitalisation, robotics, industrial automation, etc.) are attractive due to their valuations (low P/E), their capacity for cost savings and future profit growth, and because they are concentrating an increasing percentage of demand.
Another sector is banking. Companies that have undergone a strong reconversion and have been very punished in the stock market - in the last ten years Spanish banks have fallen -30% compared to 70% for the Ibex- present attractive valuations, such as a Book Value Price below 1 (their share price is lower than their real value). Moreover, they have not made capital increases, avoiding share price dilutions.
Finally, crude oil is another value asset for Trea AM. Because its price has fallen by 18%, and at current levels 30% of companies in the oil sector are not making money, and 40% of new projects are not viable. Therefore, increased demand is on the horizon to correct this effect. Moreover, the price of crude oil will not fall in the short term, because the world population will continue to grow, which will compensate for the lower oil expenditure by the increased use of clean transport - electric cars, etc.
Recommended positioning
Against this backdrop of positive corporate earnings, monetary stimulus, high debt, attractive valuations, and a boom in passive management and ESG, the experts at Trea AM recommend a counter-cyclical investment positioning to take advantage of future changes in market trends. Positioning away from liquidity, focusing in fixed income on short-dated corporate bonds and companies with good fundamentals, and in equities, on small and medium-sized growth companies, punished by the liquidity shock.
Javier Ferrer
Director of the Financial Communication Department of Proa Comunicación