Is there still a case for European Small Caps?

Transcription

1 This document is solely for the use of professionals and is not for general public distribution. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested. Is there still a case for European Small Caps? Richard Brown Investment Specialist, Pan European Equity

2 A hope rally where next? EPS expectations 30% 25% 20% 15% 10% 5% 2013 EPS growth estimate 2014 EPS growth estimate MSCI Small Cap Europe total return (RHS) 17.1% 23.4% 7.4% 170% 160% 150% 140% 130% 120% 110% 100% 0% 90% Jan 12 Apr 12 Jul 12 Oct 12 Jan 13 Apr 13 Jul 13 Oct 13 Jan 14 Source: JPMorgan, IBES, Henderson Global Investors, 24 January

3 Valuations it will get uncomfortable Valuation (Small and mid caps) 15-year average 15-year peak Current Upside to 15-year average Upside to 15-year peak P/E (trailing) 17.1x 20.5x 19.1x -10.6% +7.6% P/E Yr x 16.5x 16.0x -13.2% +2.7% P/B 2.3x 3.0x 2.4x -6.7% +23.2% Source: Henderson Global Investors, JP Morgan, IBES, as at 31 January 2014 Excludes tech bubble multiples 2

4 Current P/B (x) Valuation low versus other regions and large caps 4,5 4,0 US large cap 3,5 3,0 US small cap Global large cap Europe large cap Asia large cap 2,5 2,0 Global small cap Asia small cap Europe small cap 1,5-25,0-20,0-15,0-10,0-5,0 0,0 5,0 Upside to historic P/B average (%) Source: Henderson Global Investors, JP Morgan, as at 31 December

5 Europe Economic data improving Manufacturing PMIs Eurozone 40 Germany Italy France UK Source: Bloomberg, as at 31 January

6 The cycle Back testing results using four complete cycles Phases of the economic cycle* and investment style preferences Merrill Lynch Style Cycle Neutral value vs growth. Overweight rising momentum, high risk and small caps vs large caps. Overweight growth vs value, rising momentum, high quality, low risk and large caps vs small caps 1 2 Positive economic growth Negative economic growth Extended expansion Slowdown Recession Recovery Recession Recovery Overweight value vs growth, high quality and low risk. Neutral large caps vs small caps. Overweight value vs growth momentum, low quality, high risk and small caps vs large caps Phase 1 Rising and accelerating; Phase 2 Rising and decelerating; Phase 3 Falling and decelerating; Phase 4 Falling and accelerating Source: Merrill Lynch, MSCI, IBES, Henderson Global Investors, as at September 2008 Note: Merrill Lynch European Quantitative Strategy - Back testing period January 1992 to January 2004 * Economic cycle based on the Merrill Lynch composite macro indicator 5

7 M&A - where is it? M&A volume (Euro millions) Deal volume ($bn) > 10bn 5bn to 10bn Deal volume ($bn) bn to 5bn Deal number > 10bn 5bn to 10bn Deal number - 1bn to 5bn Source: Henderson, as at 13 February 2014 European M&A volumes Deal value and deal number refer to last twelve months in Western Europe 6

8 Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Euro (Bn) Corporates have the cash to reinvest Cash on balance sheets Source: Factset, Henderson Global Investors, as at 31 December

9 Why European small cap Superior earnings growth Valuation not a barrier 35% of small caps are down >50% since peak Attractive versus other regions Russell % since June 2007 MSCI EMU small cap -15% since June 2007 Small caps the beneficiary of the M&A cycle Source: Henderson Global Investors, JP Morgan, as at 31 January

10 European small cap Where is the value?

11 Domestic Europe no secret EPS revision ratio for exposure baskets 1,8 Domestic EU exposed US exposed 1,6 EM Industrials exposed EM Consumer exposed 1,4 1,2 1,0 0,8 0,6 jan/11 apr/11 jul/11 okt/11 jan/12 apr/12 jul/12 okt/12 jan/13 apr/13 jul/13 okt/13 Source: BofA Merrill Lynch European Investment Strategy, 31 December

12 mei/02 sep/02 jan/03 mei/03 sep/03 jan/04 mei/04 sep/04 jan/05 mei/05 sep/05 jan/06 mei/06 sep/06 jan/07 mei/07 sep/07 jan/08 mei/08 sep/08 jan/09 mei/09 sep/09 jan/10 mei/10 sep/10 jan/11 mei/11 sep/11 jan/12 mei/12 sep/12 jan/13 mei/13 sep/13 What's important in 2014? Correlation 0,7 0,6 Average pairwise Correlation - MSCI Europe 0,5 0,4 0,3 0,2 0,1 0 Source: Datastream, Henderson Global Investors, as at 12 February

13 What's important in 2014? Gartmore strategy Contribution to tracking error (%) 70,00 60,00 50,00 40,00 30,00 20,00 10,00 -- Stock Style Industries Countries Currencies Source: Henderson Global Investors, as at 20 January

14 Why go active in small cap Number of companies Average number of analysts covering the stock (RHS) 4 56 >100 >20 5 to m to 5bn Source: Bloomberg, Henderson Global Investors, as at 12 February

15 okt/10 jan/11 apr/11 jul/11 okt/11 jan/12 apr/12 jul/12 okt/12 jan/13 apr/13 jul/13 okt/13 jan/14 Anti-consensual stock picking Gartmore Eurofins Scientific analyst recommendations (+178% HPR*) Pandora stock price DKK Buy Neutral Sell Total 400 Initiation (Oct 10) At sale (Oct 12) Oerlikon analyst recommendations (+183% since purchase) 250 Buy Neutral Sell Total Initiation (Nov 11) Now (Jan 14) Initiated position Pandora analyst recommendations (+320% since purchase) Buy Neutral Sell Total Initiation (Jan 12) Now (Jan 14) Source: Henderson Global Investors, Bloomberg, as at 23 January 2014 HPR = Holding period return The above example is intended for illustrative purposes only and is not indicative of the historical or future performance of the strategy or the chances of success of any particular strategy. Henderson Global Investors, one of its affiliated advisors, or its employees, may have a position mentioned in the securities mentioned in the report. References made to individual securities should not constitute or form part of any offer or solicitation to issue, sell, subscribe or purchase the security. 14

16 Where next? Sacyr Spanish commercial property Gerry Weber Mature German consumer Meyer Burger Solar equipment orders returning Faiveley Rail equipment orders returning Gamesa Wind power remains 15

17 Restructuring Management taking action Oerlikon (Disposals Focusing on high growth Asia exposure) Pandora (Returning to core market) Fugro (Disposals) EFG International (Disposals and cost cutting) Tessenderlo Chemie (Disposals Focus on high margin businesses) Nobia (Cost savings) FLSmidth (New CEO/CFO) Safilo (HAL) Clariant (Divestments/ acquired sud chemie) C&C Tennents/US Cider Kuoni Divestments Uniqa (Austrian insurance) Gamesa (Wind turbines) 16

18 mrt/06 aug/06 jan/07 jun/07 nov/07 apr/08 sep/08 feb/09 jul/09 dec/09 mei/10 okt/10 mrt/11 aug/11 jan/12 jun/12 nov/12 apr/13 sep/13 jun/11 aug/11 okt/11 dec/11 feb/12 apr/12 jun/12 aug/12 okt/12 dec/12 feb/13 apr/13 jun/13 aug/13 okt/13 dec/13 Restructuring Oerlikon CHF 120 Oerlikon share price CHF Solar business disposal How do they spend the money? Natural fibres disposal 2012 disposals c.chf250m Source: Datastream, as at 20 January 2014 The above example is intended for illustrative purposes only and is not indicative of the historical or future performance of the strategy or the chances of success of any particular strategy. Henderson Global Investors, one of its affiliated advisors, or its employees, may have a position mentioned in the securities mentioned in the report. References made to individual securities should not constitute or form part of any offer or solicitation to issue, sell, subscribe or purchase the security. 17

19 Restructuring Nobia Revenue decline offset by cost cutting Revenue (SEK million) Source: Henderson Global Investors, Bloomberg, as at 31 December

20 Market summary high liquidity, low growth Core assumptions 1) Low GDP growth 2) Stubbornly low inflation 3) Low interest rates 4) Expect earnings to recover 5) Long drawn out recovery over a number of years Therefore: Small caps a good place to be Still 23% below peak P/B Leverage on global growth (2.2x on average) Source: Henderson Global Investors, JPMorgan, as at 31 January

21 Henderson Global Investors 201 Bishopsgate, London EC2M 3AE Tel: Fax: Important information This document is intended solely for the use of professionals, defined as Eligible Counterparties or Professional Clients, and is not for general public distribution. Past performance is not a guide to future performance. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested. Tax assumptions and reliefs depend upon an investor s particular circumstances and may change if those circumstances or the law change. If you invest through a third party provider you are advised to consult them directly as charges, performance and terms and conditions may differ materially. Nothing in this document is intended to or should be construed as advice. This document is not a recommendation to sell or purchase any investment. It does not form part of any contract for the sale or purchase of any investment. Any investment application will be made solely on the basis of the information contained in the Prospectus (including all relevant covering documents), which will contain investment restrictions. This document is intended as a summary only and potential investors must read the prospectus, and where relevant, the key investor information document before investing. Issued in the UK by Henderson Global Investors. Henderson Global Investors is the name under which Henderson Global Investors Limited (reg. no ), Henderson Fund Management Limited (reg. no ), Henderson Investment Funds Limited (reg. no ), Henderson Investment Management Limited (reg. no ), Henderson Alternative Investment Advisor Limited (reg. no ), Henderson Equity Partners Limited (reg. no ), Gartmore Investment Limited (reg. no ), (each incorporated and registered in England and Wales with registered office at 201 Bishopsgate, London EC2M 3AE) are authorised and regulated by the Financial Conduct Authority to provide investment products and services. Telephone calls may be recorded and monitored. Ref: 34S \\Dist\Glob\BS\Pres\Equi\Eur\Rich Brown\Brussells.pptx 20