Maximilian Köhn, fund manager of the DJE - Europa
European potential: quality stocks and hidden champions
The European stock market looks favorable compared to the US market but this alone is not an investment criterion for Maximilian Köhn, the fund manager of DJE - Europa. He sees Europe's future potential rather in quality stocks and hidden champions from the second and third row.
The Corona pandemic has changed the world. Europe is no exception. Would you still say that European equities tend to be one of the more attractive asset classes at the current level?
The impact of the Corona pandemic is immense and has severely affected the economic development in Europe. However, the fiscal packages passed in response and the associated increase in government debt mean that interest rates will remain low over the long term. Accordingly, equities remain very attractive as an asset class with virtually no alternatives. This also applies to European equities, particularly from the point of view of "current levels".
Keyword "valuation", where do you place European shares?
The discrepancy in valuation between US and European stocks remains enormous and is largely due to the overweight of technology stocks in the US capital market. Covid-19 accelerated this: Technology stocks attracted investors even more due to their digital business models what rose the valuation discount of Europe even more. However, Europe offers a wide range of interesting stock market stocks. This range includes traditional dividend aristocrats, innovation leaders in old economy sectors, world leaders in niche markets or, more generally, fast-growing stocks that are in no way lagging behind their American counterparts. However, the composition of the market in Europe often makes it necessary to look for these stocks in the second and third rows.
How do you see Europe's chances of outperforming the US market?
A blanket comparison based on the leading indices is difficult and not necessarily meaningful because the composition of the indices is very different. The US market is dominated by technology stocks. Take FAANG shares* which were largely responsible for the good performance of the NASDAQ in the current year. In the European market the companies of the old economy set the tone - measured by market capitalization. The performance this year was correspondingly different. One of the main drivers was and is Corona. The pandemic has not only had a positive impact on digital business models on the demand side but has also paralyzed physical business models - regardless of market position - by disrupting supply chains.
As Europe is still very much shaped by the old economy the broad European stock market looks very favorable, but growth and therefore imagination is lacking. If you look at the MSCI Europe Value Index, for example, you can see that it has only moved sideways for almost 20 years. Even in times of the Covid 19 pandemic shares of structural losers were not able to increase in value even though their valuation was really favorable and even fell further. Sectors such as energy, finance and real estate have fallen by more than 20% this year.
But, and this is crucial: Europe also has hidden champions and growth stocks to offer. These have outperformed value stocks in Europe by more than 90% over the past ten years. And together with the classic quality stocks these hidden champions from Europe have again clearly outperformed the broad market this year. If the unequal sector weighting were to be eliminated and companies with lower market capitalization were to be given greater consideration through equal weighting, Europe's strength would show up in the form of quality companies and hidden champions. Against this background there is a real chance that Europe could at least partially reverse the valuation discount and outperform the US market.
What worries you with regard to the continent?
There is a risk that, after the first extreme measures further fiscal expenditure may no longer be sufficient to address the economic consequences of Covid-19. Germany already spent 9% of GDP for possible measures. The US and Japan have spent a similar amount (11% and 11% respectively) while China has so far spent only 4%. Compared to the rest of Europe Germany spends the most while France's figure is only 2%. A possible negative side of the pronounced state fiscal support for companies is the (unintended) emergence of so-called zombie companies. A stronger state dirigiste influence on the economy and companies should also not be underestimated. All these are potential risks for a market economy.
Germany has always been regarded as a place of stability in Europe. After the astonishing performance of the past four months are German shares still worth to be bought? Which sectors are worth a closer look?
The Dax recovered over 35% after the low in March. This catch-up was driven by fiscal policy measures, the hope of a (medical) response to the pandemic, i.e. vaccines and medicines and the expectation of a resulting economic recovery, ideally in a V-shape. But some sectors surprised me because order books and the outlook for the future do not look very promising. The question, of course, is how the economy will develop. If expectations are low the basis for comparison for 2021 is quite attractive. Cyclical sectors such as oil, chemicals, banking or automotive would also perform better than in 2020.
For us as investors, however, short-term (binary) unique events - and we see the approval of a Covid-19 vaccine as such - are not decisive. In the long term, the question for me is therefore which companies will benefit from the infrastructure programs and the digitalization drive. A crisis is often a catalyst for structural change, the beginnings of which have already become apparent within a few months in the context of the Corona pandemic. Within two to three months there was massive investment in digitization which under normal circumstances would certainly have taken two to three years. We believe that this trend should be more sustainable in order to support technology and e-commerce titles. In this context I do not think that high valuations are an exaggeration.
How do you see the current situation in the European periphery?
The European periphery was particularly hard hit by Corona,as the tourism industry is often the largest contributor to GDP. Moreover, missed investments often make industrial companies uncompetitive and this is unlikely to change in the current situation. This is reflected in the performance of the country indices, let's take Spain as an example: the Spanish leading index is still down about 25% this year. The situation is similar in Great Britain. There, the index is being weighed down in particular by the high weighting of banks. In contrast, the DAX has more or less returned to the level it was at the beginning of the year. There will certainly be isolated opportunities but the peripheral countries are not a major theme in the fund.
Can you briefly outline your approach?
The fund's investment strategy combines the best of both worlds: quality stocks and hidden champions. In times of low interest rates and high volatility on the capital markets quality shares represent the "safe haven" in the portfolio. Quality companies often operate in structural growth markets and have once again proven their stability during the Corona crisis. Hidden champions, by contrast, are often market leaders in their niche. They are able to achieve strong growth with high profitability thanks to the negotiating and pricing power they enjoy.
Furthermore, I am convinced that there are also shares in Europe of companies which may not yet be in the general focus, but which can be highly interesting and promising for the future. Ultimately, we are striving for a combination of security, performance and price fantasy. Moreover, it is nowhere written that Europe cannot also produce a digital champion in the future.
Note: All information published is for your information only and does not constitute investment advice or other recommendation. Long-term experience and awards do not guarantee investment success. Securities are subject to market-related price fluctuations which may not be compensated for by the active management of the asset manager or investment advisor. This information cannot replace a personal consultation. All information has been provided with care and to the best of our knowledge at the time of preparation. Despite all due care the data may have changed in the meantime. Further information on opportunities and risks can be found on the website www.dje.de. The sales prospectus and further information are available free of charge in German from DJE Investment S.A. or at www.dje.de The fund management company is DJE Investment S.A. DJE Kapital AG is the distribution agent.