Presenting the rock stars of European investment
Focus on specific firms at specific prices, says Matein Khalid
Europe is the theme de jour in global equities, thanks to its strongest economic growth since the Greek sovereign debt crisis, a rise in EPS growth, $30 billion inflows into dedicated funds and a valuation discount to Wall Street. Yet “buy Europe” is a meaningless concept to me. I focus on specific companies at specific prices. My real-time picks in Europe are Credit Suisse, Allianz, Munich Re, Kering, ENI, Volvo and Siemens. Warum/pour quoi? Credit Suisse has been Swiss banking rock star in Europe, with shares up 30 per cent in Zurich since August 2016. The rights issue both boosted its Basel Tier One capital ratio and obviated the need for an IPO of its Swiss Universal Bank unit.
Massive cost cuts, an exit from low margin investment banking businesses, a renewed focus on Asian wealth management and a new product mix earnings growth can continue to rise well above consensus estimates in 2018. Global capital markets, credit and the M&A pipeline will also contribute to net profits. Credit Suisse is a buy on any pullback to 13 Swiss francs for a 17 target.
Allianz, one of the world’s most successful insurers and asset managers, (owns Pimco ex-Bill Gross!) is undervalued at €178 billion in Frankfurt at a time when the German Bund yield curve has dramatically steepened. Pimco inflows are above $50 billion, life insurance net profits are on a roll and the UK joint venture will soon go live. Allianz has a combined ratio of 93 and trades at a forward price to earnings ratio of a mere 11.4. Allianz can well rise to €200 in the next 12 months.
The European Central Bank engineered ultra-low interest rates and sluggish reinsurance premia had also clouded the outlook for Munich Re, the world’s leading reinsurer. However, as German Bund and US Treasury bond yield rises, so will Munich Re’s investment income. The glut in global reinsurance capacity is also easing, allowing premiums to rise. Munich Re is undervalued at 0.9 times book value and 12 times 2018 earnings even though it is one of the world’s best capitalised reinsurers with a disciplined underwriting culture, a shareholder value ethos and a dividend yield of 4.7 per cent.
It invariably makes sense to buy reinsurer shares after a period of heavy catastrophe claims as premiums rise while underwriters boost claim-loss reserve ratios and reinsurance capacity falls.
Cyber-risk is also a growth area at Munich Re. My buy/sell range for Munich Re is €170-€210 in the next 12 months.
Kering is France’s “other” luxury goods colossus other than LVMH. Owner of the Balenciaga, Puma and Yves St Laurent brands, Kering’s fabulous performance on the Paris bourse is due to the amazing turnaround of Gucci, a brand I followed since the late-1990s when it was owned by Bahrain investment bank Investcorp. Creative director Alessandro Michele has electrified French haute couture and Gucci revenues, though a hard landing in China and the terrorist threat to La Ville Lumière remain key risks. The Italian luxury brand, so tired under Tom Ford, now delivers 35 per cent Silicon Valley scale revenue growth, making Kering a must own luxury goods stock. Readers of my column know I view BNP Paribas and Société Générale as among Europe’s top bank shares since 2013.
ENI, once led by the legendary Enrico Mattei, is Italy’s energy supermajor and one of the most successful upstream oil and gas firms in the world. Output growth has risen to 1.84 million barrels of oil equivalent, powered by new projects on steam in Libya and Kazakhstan. Despite the Nigerian bribery case, CEO Claudio Descalzi has not been axed by the board. ENI has had exploration successes in the Gulf of Mexico, Angola and Norway and the Mozambique LNG plant has the potential to be a cash cow. ENI sold stakes in offshore Egypt gasfield to Rosneft and BP for $1.5 billion. Traded in Milan, I would accumulate ENI at €13 for a €16 target.
Volvo has fallen to 137 kroner from its 152 high due to a slump in the North American truck deliveries. Yet this segment is bottoming and construction equipment/mining excavators and loaders is still robust. This has led to Volvo’s 28 per cent return in 2017. My buy/sell range on Volvo in Stockholm is 125160 Swedish kroner. This is the Swedish industrial to own in 2017, not Atlas Copco, or Sandvik.