Europeans are renowned for the July - August holiday period, but somehow holidays are looking either difficult to come by (unaffordable) or effectively cancelled due to extra work required to keep head above water. In the UK, holidays are confused by the imminent Olympics, or by the torrential and unseasonable rain. In some areas as well, there are fears that the recent slower economic activity may lead to reduction in the number of shifts as well, as production cost flexibility remains imperative.
So what is really going on? Firstly we are about to enter the second quarter reporting season, and with economic growth having been weak and the immediate outlook showing no signs of improvement, it should be expected that companies will be cautious. Indeed Bloomberg's consensus earnings estimates for the European equity markets have fallen from a rise of 8.2% in 2012 to 3.2%, and 2013 from 10.2% to 6.2%. Secondly, recent economic news has been - at best - mixed, across the world. Of particular note is the recent German manufacturing data that fell below the critical 50 level.
So there are plenty of reasons to suggest that the low growth, low inflation world will persist for quite a bit longer. The next risk or worry is therefore whether economies have reached “stall speed” (where conventional measures can no longer help), and the very fact that this risk exists makes us confident that the “powers that be” are beginning to think of further measures of stimulus.
This brings us neatly to the European situation. The Euro project is at a crossroads: it develops and integrates further, or it starts to unravel as European leaders fail to convince their domestic electorates of the merits of continuing with what has so far been a troubled project. One of the problems with equity markets is the extraordinary lack of patience on anything that takes longer than a nanosecond to happen. While years of misleading and disappointed expectations are probably the cause of this, it does not mean that the Euro project was ever going to be straightforward. However the recent summit was in some ways another step in the direction of closer European integration. Furthermore, breaking the link between banks and their sovereign does perhaps help investors understand that on a “starting from now” basis, (i.e. ignoring years of debt built up by previous governments) most Euro members are in reasonable shape.
The debate has also now moved on - away from being obsessed with “austerity” (probably the most misleading word re-invented in the last five years), to growth. The issue here is that growth cannot be “conjured” from nowhere, and although clearly governments continue spending significant amounts (borrowing in the UK by the supposedly austere Conservative coalition government is still higher than under the previous profligate Labor government), and more of this is being directed towards infrastructure spending.
So this leaves us with an uncertain picture for economies in Europe, and whatever happens, a period of low growth. In this environment we continue to favor investing, on a patient basis, in companies that can hopefully be part of the solution: companies that help other companies operate more efficiently, such as software company SAP, or logistics provider Deutsche Post, DHL, or UK outsourcer Capita.
Recent results from freight and logistics company Kuehne + Nagel also proved interesting and affirmed my view that in this testing environment the strong will get stronger and the weak will get weaker (or cease altogether). The results themselves were downbeat with topline growth of +2.8% and a decline of EBITDA of 9.6%. This shows two things: First the overall air and sea freight markets are weak (hardly surprising given the overriding economic momentum) and second, they are taking share. The freight market is very fragmented with a number of smaller players, customers can currently drive a hard bargain when setting their terms and smaller companies are struggling to meet them. Combine this with a cost reduction program being rolled out by management and we believe you have a good, long term winner. This dynamic is not only at work in the freight area but across industries. That’s why we are focusing our investments on market leaders that often warrant their valuation premiums.
Tim Stevenson is Henderson Global Investors Pan European fund manager. Henderson Global Investors is represented in Israel by Meitav Investment House.
Published by Globes [online], Israel business news - www.globes-online.com - on July 24, 2012
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