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Renaud Froissart, Quaero

European stock markets more challenged as long term government bond rates climb, says Quaero


The valuation of European stock markets is proving less attractive than previously, notably because of higher long term government bond rates, according to Renaud Froissart, manager of the Quaero European Long Short Equity Fund.

The fund returned minus 2.7 per cent in October 2016 versus minus 1.0 per cent for the HFRX Equity Hedge EUR Index, but since inception on 20 February 2014, the fund is +5.7 per cent versus -5.5 per cent for the HFRX Equity Hedge EUR index.
Through October, the net investment rate was +60 per cent (comprised of 80 per cent long individual stocks and a 20 per cent short position) using Euro Stoxx 50 futures. Froissart notes, however, that stock markets' technical regime pointed to an improving picture.
The stock selection process of the fund is the result of a purely bottom-up analysis that exclusively relies on strict and objective financial criteria applied to a universe of 1,700 western European companies.
Out of the selected stocks held within the long leg of the portfolio, 31 per cent had a positive absolute price performance and 49 per cent showed a price performance above that of the Stoxx 600 Europe index. During October the most positive contributors to the fund's long leg performance were Finnish renewables company UPM Kymmene (+11 per cent), steel specialist SSAB (+10 per cent) and Finnish multi-media firm Sanoma (+8 per cent), which announced a 25 per cent rise in EBIT and a 35 per cent increase in its cash flow from operations.
Other stocks Kloeckner (+6 per cent), and BP (+5 per cent), performed well on the back of renewed investor interest for mining and energy sectors, despite the absence of noticeable news for both companies.
The five under-performers within the long leg of the strategy were German food systems company GEA (-27 per cent), which lowered its full year guidance after a lower than expected Q3 numbers, Swiss pharma and bio-tech stock Actelion (-15 per cent), UK-listed Randgold Resources (-13 per cent) whose shares were down on the back of softer gold bullion prices and Dutch company Corbion (-13 per cent), which completed its EUR50 million share buy-back programme.
Purely as a result of the bottom-up process, 48 per cent of the companies held have their roots in countries whose sovereign debt rating stands at AAA/stable according to both S&P and Moody's (Denmark, Germany, Netherlands, Norway, Sweden and Switzerland). That is a significant overweight compared to 30 per cent for the fund's universe of European stocks as a whole.
Froissart says higher rated countries tend to have pro-business policies and stable regulatory and fiscal environments, while their companies have better governance, transparency, and socially responsible practises, productive workforces, and highly attractive domestic markets.
From a thematic standpoint, the fund continues to be geared towards companies benefitting from two ‘mega-trends’: the revolution in digital automation and clean tech activities. Twenty five per cent of the fund is invested in companies that benefit from the numeric and process automation trends, either because they belong to the TMT sectors (Altran, ASML, Atos, Software AG) or are well advanced in the numerisation process (Sanoma), or because they are heavily involved in process automation (Tomra Systems, GEA Group). This proportion is more than twice as high as in the general European stock market universe (10 per cent)
Another quarter of the fund is invested in renewable energy, waste and resources management, sugar production or renewable biodiesel industry, a proportion about four times higher than in the general European stock market universe (6 per cent).

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