At GAM Investments’ latest Equities Meeting, held on 22 June, our managers shared their thoughts on the recent corporate activity in the UK, the strength of European equities and the recent correction in China.
Adrian Gosden - UK Equity Income
The single largest feature of the UK market of late has been corporate activity, with over 200 transactions happening in London over the last year. We are now starting to see the signs that private equity firms really want to press the pedal; given the prospect of having access to ‘free money’ forever is dissipating, they appear to be pressing for larger transactions. Thus, we expect to see a number of FTSE 100 companies taken out this year. The most notable move recently was Clayton, Dubilier & Rice’s bid for Morrisons. In our view, the driver behind these plays is the international buyers who are able to buy UK-listed companies at nearly half their real value. With these companies being so lowly valued, private equity companies could be set to make a lot of money, most particularly in the case of Morrisons if food price inflation returns. The UK is made is even more attractive by the efficient legal and accounting systems in place, plus elsewhere, governments appear to be thwarting any takeover attempts (such as the Carrefour deal in France). We believe it is going to turn into a free-for-all in the second half of this year and if that happens, undoubtedly the listed UK equities pool will shrink.
Niall Gallagher – European Equities
Although the market has drifted somewhat of late, from a European equities’ perspective in our view nothing has changed. At a macro level, there has been tension between reflation and disinflation, and following the announcement by the Federal Reserve (Fed) last week, there has been a reversion away from reflation trades. However, we are not seeing any material change from a bottom-up perspective. For example, Kingspan, an Irish-based building materials company, released a pre-announcement of results this week due to their revenues and profits being so far ahead of expectations, up circa 30% versus the comparable period in 2019. It has reported record raw materials inflation but this is being passed on to customers with record margins being made, indicating trading profit is likely to increase significantly. These results appear to be reflected when speaking to other companies such as Ashtead Group, an equipment rental company, with the CEO claiming to be experiencing some of the best cyclical conditions the company has ever seen. While there are some fears that we are reaching peak cyclical conditions, in our view the evidence suggests otherwise. The Norwegian oil company Equinor is benefiting from the move to green energy, generating circa EUR 9 billion of free cash flow from oil but also set to become an international leader in solar and wind power. From here, our outlook is positive; we believe it is a good time to invest in the asset class.
Rob Mumford – China / Asian Equities
Our prediction for a choppy first half, as recovery meets higher discount rates, seems to have played out. The view that the style rotation would become more nuanced this year has led us to be opportunistic in our style preference. In March / April we took advantage of China equity weakness around marginal tapering, elevated regulatory scrutiny (in various sectors but particularly the internet platforms), some credit concerns and weakness in the US-listed China stocks to increase China growth exposure and this has largely paid off. More recently, following the scrutiny from the Chinese authorities in the commodity sector and then the recent Fed meeting, we believe value looks attractive, particularly in the ‘green materials’ segment where we are bullish on the outlook for copper, aluminium and lithium in particular. Our nuanced style view, this year, has led our key focus to be opportunities in growth at a reasonable price (GARP) in companies executing well versus the Covid-19 and now, post Covid-19 eras. Names that we have added in the last few months have been in the sportswear, property management and more recently child milk formula names, which, in our view, have recently reached an attractive entry point. Recent birth rates in China have been subdued due to Covid-19. however the shift in child policy which by 2025 could see the lifting of all child restrictions in China, plus the powerful ‘Guochao’ theme which is the phrase used to describe an increased trend of favouring domestic over foreign brands, show positive tailwinds ahead.
The information in this document is given for information purposes only and does not qualify as investment advice. Opinions and assessments contained in this document may change and reflect the point of view of GAM in the current economic environment. No liability shall be accepted for the accuracy and completeness of the information. Past performance is no indicator of current or future trends. The mentioned financial instruments are provided for illustrative purposes only and shall not be considered as a direct offering, investment recommendation or investment advice. Reference to a security is not a recommendation to buy or sell that security. The securities listed were selected from the universe of securities covered by the portfolio managers to assist the reader in better understanding the themes presented. The securities included are not necessarily held by any portfolio or represent any recommendations by the portfolio managers. There is no guarantee that forecasts will be realised.