A Global Perspective
In its latest forecast, the OECD has spoken of a moderate expansion underway in most major advanced and emerging economies, but they also highlighted that growth remains weak in the Euro area, which runs the risk of prolonged stagnation if further steps are not taken to boost demand.
This healing of the global economy post the recession is clearly to be welcomed by investors as it means better top-line growth for companies which can fuel profit and dividend potential, which can drive stock price performance.
The link between economic growth and share price performance is not that clear cut as company managements have many levers to pull (such as managing costs better, product mix etc.) to generate solid bottom line numbers. Last week, we met with Paul Bulcke, CEO of Nestlé, who remarked in conversation “We don’t sell GDP’s!”, meaning that a company like Nestlé is not just dependent on a GDP number. In fact despite the economic slowdown, Nestlé’s sales were over 10% ahead over the years 2012 and 2013. We find that many of our portfolio companies have navigated a path through these challenging times with the benefit of solid balance sheets, strong underlying cash flows and accomplished and proven management teams, which are among the elements we seek out in our stock selection.
However, the Eurozone economy is clearly a laggard in this mild economic upswing and requires careful management from policy makers to ensure a better economic outlook. In the meantime, one outcome will be that Eurozone interest rates will be anchored at extremely low levels for several years to come.
But what about the prospects for Eurozone companies in our portfolios? Firstly, Eurozone equities are currently under-represented in our portfolios; we have significantly more exposure to markets such as the US and UK. Then if we look at the composition of the revenues of those Eurozone stocks that we do own we see that they are very well diversified over a number of regions, not dependent just on Eurozone prospects but offer a truly global source of growth.
At Appian we are driven not by benchmark but by opportunity. We target those companies where a strong management team can deliver sustainable and growing cash flows to fund the business and reward shareholders. The domicile of the company is very much secondary to how it matches our investment criteria. Of course, we will always look to have a well-diversified equity portfolio of high quality stocks, but we are driven by our bottom-up stock selection and conviction about the investment case, not a stock or a region’s weight in any benchmark.
In the past few weeks the equity team has been travelling and meeting with a whole range of companies throughout Europe and the UK. Across a wide range of sectors from IT to financial services to media, we continue to find companies with positive fundamentals and attractive valuations. Our equity portfolios, across our range of funds, can benefit from both these new pipeline ideas and our current set of quality holdings.