Each week, a professional investor tells MoneyWeek where he’d put his money now. This week: Chris Hiorns, manager of the Ecclesiastical Amity European Fund.
Over the last year, the financial markets have seen extreme volatility as the credit crisis and global economic slowdown have swept across Europe and pushed most countries into deep recession. The euro’s strength has also hurt exporters even as global trade has stagnated and industrial output dived. The economic outlook remains grim. And while the equity market has rallied from its March lows, we believe this is unlikely to be sustained.
However, even in this environment Europe offers opportunities to invest in a range of strong, profitable firms with global footprints. The sharp decline in equity markets has depressed valuations and many firms look cheap from a historical perspective, even those in relatively defensive business sectors.
Utilities are traditional safe havens. But many are highly financially geared and may prove less secure than in previous recessions. An exception is Suez Environnement (FP: SEV), which was spun out of GDF-Suez and contains its water and waste-management units. Suez is less geared than many of its peers. Europe’s regulated water businesses should prove resilient in the slump, even if industrial water consumption falls.
The waste business, while exposed to falling industrial output and the fall in demand for recycled materials, is well placed to benefit from tightening environmental regulations across the globe. The group also has exposure to international water markets and should benefit from China’s increased infrastructure spending, which includes plans to build more than 1,000 new water purification plants.
The pharmaceutical sector has traditionally generated growth across the economic cycle, but concerns over generic competition and a squeeze on health spending has led to de-rating of the sector. Merck KGAA (Xetra: MRK) has increasingly shifted its business from chemicals into pharmaceuticals and specialises in developing biologics. These require a more complex manufacturing processes than conventional drugs and so are less vulnerable to generics. Sales should be driven by the growth in colorectal cancer drug Erbitux and the ongoing success of Rebif (for multiple sclerosis).
Merck invests heavily in research and development. Its programme includes late-stage drugs, such as cladribine for multiple sclerosis, and Stimuvax, a vaccine to prolong survival in lung cancer cases. The group is also the dominant global player in the production of liquid crystal displays. These have seen rapid growth via the adoption of flat-screen televisions, although they face competition from other technologies in the long run. Merck has a strong balance sheet and should weather the downturn while generating strong cash-flows and earnings growth in the longer term.
Metro (Xetra: MEO) is one of the world’s leading retailers. It gets most of its revenue from food wholesale and retail, but with added exposure to department stores and consumer electronics. Its key operations are in Germany, but it also has a strong international business with a large presence in eastern Europe. It is a world leader in its core cash-and-carry business, which should deliver solid earnings growth even in deteriorating market conditions. Metro appears cheap both compared with its peers and from a historic perspective.
The stocks Chris Hiorns likes
| 12-month high | 12-month low | Now | |
|---|---|---|---|
| Suez Environnement | €19.95 | €9.70 | €12.52 |
| Merck KGAA | €93.92 | €53.00 | €63.02 |
| Metro | €52.15 | €16.72 | €33.04 |