Each week, a professional investor tells MoneyWeek where he’d put his money now. This week: Kevin Lilley, fund manager at Royal London Asset Management.
Anticipating the end of an aggressive recession and a subsequent recovery, European stockmarkets have risen strongly since March 2009. That trend is likely to continue; I believe we have just entered a new business cycle that is likely to last a number of years.
Sure, growth is liable to remain subdued as governments and households continue to deleverage. But we’ve entered this new cycle with far higher profit margins than experienced after previous economic troughs. That’s because the severity of the recession allowed companies to take more aggressive cost-cutting measures than they have previously, putting them in a great position to grow margins now.
European equity markets comprise a collection of international companies with strong brands and a high degree of international diversification. So while Europe as a whole may suffer slow economic growth this year, many firms will benefit from their exposure to stronger economies, such as those of America, China and Brazil. I seek firms that have a decent exposure to those economies, but that are also available at sensible valuations.
My first pick is Renault (PA:RNO), the French car company. Combined with Nissan, in which it owns a 44.3% stake, the firm has a very strong global platform. Renault boasts extensive coverage of Western Europe and, thanks to its Dacia brand, it is also well represented in emerging markets. Nissan provides the group’s exposure to the States and China, where growth is strengthening. The Renault Nissan combination will also be offering the first mass-produced electric cars, on sale from the middle of 2011. The collaboration gives the firm the scale required to provide investment in future technology. Yet, if you strip out the market value of Renault’s stakes in Nissan and Volvo Trucks, Renault’s core business is valued at zero. That implies some big potential upside as the economic backdrop improves.
My second pick is SES Global S.A. (PA:SESG), the Luxembourg-based satellite operator. SES has a 25% share of the satellite market, which is currently enjoying healthy growth. The business has strong barriers to entry and is seeing greater demand for satellite capacity. That’s in part because the number of satellite TV channels is growing as people upgrade to television sets that are HDTV capable. The recently launched 3D TVs offer a brand-new experience, which will also require more channels. There is growth too in the market for high altitude military reconnaissance drones, which use substantial satellite capacity. All three of these new technologies requires higher capacity than traditional satellite TV stations, and that will drive profitability for some time.
Lastly, I like CSM NV (AS:CSM), the Dutch food ingredients business. It is the world leader in bakery supplies, delivering raw ingredients as well as almost-ready and ready-made products. Customers include artisan bakers, bakery chains, in-store bakeries, industrial bakeries and food service companies. Its strengths lie in product innovation. CSM also owns another business called Purac – a market leader in producing lactic acid. Purac has developed a lactic acid-based, heat stable, biodegradable bioplastic made from renewable materials. This has many uses, including packaging, which will be the growth engine for CSM.
The stocks Kevin Lilley likes
| 12-month high | 12-month low | Now | |
|---|---|---|---|
| Renault | €40.39 | €15.11 | €35.35 |
| SES Global S.A. | €18.98 | €12.63 | €18.70 |
| CSM NV | €23.79 | €8.55 | €23.71 |