Alvaro, where did you go during your last trip to Europe?
I spent a couple of weeks attending the Spain Investors Day Conference in Madrid, the Swiss Equity Conference in Bad Ragaz, and the German Corporate Conference in Frankfurt. In total, I had the opportunity to meet with 44 companies, as well as sit in on keynote speeches from a variety of presenters – including Economists, Equity Strategists and Spain’s Prime Minister, Minister of Economy and Minister of Energy.
What are you goals when making these yearly trips?
As an investment team, we generally tend to visit the regions we cover a couple of times each year. The goal is to meet with the management of companies we invest in (or are looking at for potential investment), but also as important is to get a firsthand read of the economic and relevant market trends in specific countries and regions. For this trip in particular, some specific goals were: (1) get a bottom-up read on business conditions in the countries visited as presented by the managements of the companies I visited , (2) get updates on some of our portfolio holdings (particularly Spain’s ACS and DIA), (3) track regulatory developments for the infrastructure and utilities industries in Europe, (4) get a closer read on the stage of the real estate cycle in Europe (Germany in particular has experienced a property boom supported by low rates over the past several years), and (5) track consumer trends as presented by the different companies (brands, retailers) in the sector.
What type of trends were you noticing this time around?
A view that was common to all of the countries I visited is that the economy has fully recovered from the impact of the Great Financial Crisis (GFC) and other regional shocks such as Brexit. The best analogy that I heard while in Europe was that “the patient is not only out of the ICU, but has been discharged from the hospital”. What follows is a topic that our investment team at Cambiar has had continuing conversations for the past few months – namely, that the rationale supporting monetary accommodation in Europe has diminished, thus the ECB should follow the path of the U.S. toward normalization in the future. Interestingly, the timing of the adjustment remains less clear on both sides of the Atlantic, and tied to signs of inflation (particularly wage inflation) emerging. The bottom-up read is that earnings are still growing, and visibility remains good. The strength of the Euro was another notable topic on this trip, particularly for export-oriented companies.
What are you seeing in the Utilities sector?
For the past few years, European utilities have been going through significant transformation; initiatives include the shutdown of nuclear capacity, efforts to limit emissions and a drive towards renewable/sustainable power. The direction has been to add capacity in wind/solar/biomass and less in carbon (with the exception of gas), and pursue more contract based/feed in tariff supply, as opposed to spot sales. A number of leading utility companies in Europe are separating their regulated activities (viewed as more profitable and valuable) from the non- regulated portfolios (i.e., lower multiple generation). I would also note that in terms of the adoption of innovation, the European utilities remain at the forefront. A couple of examples are the increased and accelerating adoption of battery technology – not only to optimize grid management, but to actually make solar and wind viable as base load. During my trip, some of the most interesting meetings and potential opportunities for our discipline across the cap spectrum were with companies that are looking to take advantage of the evolution of the sector. This was the case for all three countries that I visited.
Any notable trends in Consumer Discretionary?
Cambiar’s approach to investing in this space benefits from having a clear preference for well-established brands; i.e., those companies where the price/value proposition (even for the Luxury segment) are well defined. While a healthier economy is supportive of consumption, the retailers, brands and concepts that offer the best value to price are becoming more dominant. The risk of a tide that lift all boats is to gravitate towards trendy but ephemeral “concepts”, which can often translate into “boom-bust” investment outcomes. In general terms, Europe is not as “over retailed” as the US market has historically been. There are also success stories in more durable flagships brands like Adidas, Zara, Louis Vuitton, Moncler, Gucci and Cartier. The contrast is in struggling brands such as H&M, Esprit and Marks & Spencer. Visiting different countries is useful in tracking how these brands are performing (or not) in real time. In the current environment, identifying the best in class is becoming increasingly important. Europe is also a beneficiary of Chinese tourism, so brands with global aspirations are making their way to the market, including Japan’s Uniqlo and Muji. Europe is also ahead of the U.S. in e-commerce penetration – particularly Germany. What is interesting at the company level is that European brands do not speak of their efforts as e-commerce, but rather omni-channel strategies that integrate the on-line experience with the brick and mortar store that can be used as fulfillment and service hubs. In food retail, the consumer is migrating towards convenience and price. The one stop big box is struggling, while smaller stores that offer attractive prices and convenience via their locations in high-density areas are gaining share.
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