At the half year a number of strategists at the larger investment houses began to upgrade Europe to ‘overweight’. Factors such as lower interest rates in Europe and higher inflation expectations in the US lay behind this call with European equities the likely beneficiaries of macro economic tailwinds. A convergence in GDP growth forecasts next year, showing that there is no longer a standout region for growth (hitherto with the US and China had been dominating Europe) was also at play as was the potential for rising profitability in the aftermath of Covid.
Aubrey’s European Conviction strategy benefits from this tailwind, along with other more structural tailwinds that have been identified as a result of the bottom-up strategy the firm deploys. Themes such as digitalisation and decarbonisation, which have been prioritised allocations from the EU NextGeneration recovery fund, are providing a positive backdrop for cyclical shares, which look attractive, not least from a valuation standpoint.
The PE multiple divided by earnings growth (PEG) plays a key part in Aubrey’s investment process. Historically this has traded in a range of 0.7-1.5x for the strategy, but as at the end of last week, this reached a historic low of 0.5x as illustrated in the chart below. The recent H1 earnings season saw the vast majority of companies in the portfolio meet or beat analyst expectations, as well as raise guidance for the full year, and in some cases, the following years.
The median earnings growth for the portfolio this year is 68%, and next year 19%. A company that we expect to exceed the median earnings growth next year is a German company operating in the semiconductor industry.
This company plays a key role in the semiconductor market as the company’s technologies cultivate crystal growing which is used for wafer production. Trends such as digitalization, e-mobility, 5G and other use cases are driving demand for the company’s end clients, manufacturers of silicon and silicon carbide wafers, who are increasing capacity. This is reflected in a recent EUR95m order for crystal growing systems for a new foundry in Singapore, giving our investee company order visibility from to 2025.
Another company in the strategy that exceeds the portfolio median earnings growth next year is a Spanish renewable energy company, specialising in wind and solar energy. Part of the investment rationale was that capex costs have fallen markedly; it cost $7m to build 1MW in 2007 compared to $400k today. The company plans to double capacity this year relative to last and raise it again by 66% in 2022. We expect significant growth over the next three years as economies of scale materialize.
These are just two examples of stocks that have contributed to the portfolio’s attractive valuation. We believe the correction seen in the latter weeks of September has contributed to this low PEG, and we do not believe this pricing opportunity will stick around for very long.
The strategy returned 337.7% over ten years as at the end of September, outperforming the index by 188.3%, and we are confident we can repeat this track record going forward.
Please click here for a pdf version.
This document has been issued by Aubrey Capital Management Limited which is authorised and regulated in the UK by the Financial Conduct Authority and is registered as an Investment Adviser with the US Securities & Exchange Commission. You should be aware that the regulatory regime applicable in the UK may well be different in your home jurisdiction. This document has been prepared solely for the intended recipient for information purposes and is not a solicitation, or an offer to buy or sell any security. The information on which the document is based has been obtained from sources that we believe to be reliable, and in good faith, but we have not independently verified such information and no representation or warranty, express or implied, is made as to their accuracy. All expressions of opinion are subject to change without notice. Any comments expressed in this presentation should not be taken as a recommendation or advice. Please note that the prices of shares and the income from them can fall as well as rise and you may not get back the amount originally invested. This can be as a result of market movements and of variations in the exchange rates between currencies. Past performance is not a guide to future returns and may not be repeated. Aubrey Capital Management Limited accepts no liability or responsibility whatsoever for any consequential loss of any kind arising out of the use of this document or any part of its contents. This document does not in any way constitute investment advice or an offer or invitation to deal in securities. Recipients should always seek the advice of a qualified investment professional before making any investment decisions.
