Brrrrrr…
Markets are freezing following the Fed meeting, which shows that interest rates will start to normalise in 18/24 months’ time, with a couple of hikes expected in 2023. The best of possible hypotheses. If Jerome Powell would’ve been too timid (just one hike in 2023), commodities, bitcoin and speculation would have gone even further. He had talked about a very close timing (2022), a real taper tantrum would have been inevitable. So why has the market fallen? Two hikes instead of one expected in 2023 would indicate, according to some commentators, some FED anxiety… This is clearly the micro-rhetoric we’ve seen so many times from the FED meetings. In fact, nothing serious has happened. The market is bored and needs jolts from time to time. But the situation remains positive. The environment is one of growth with weak (and positive) structural inflationary pressures, and strong economic inflationary pressures, due to a series of bottlenecks that will quickly be reabsorbed (the FED’s comments will help to do so). The market may still fall a little, but the only reason for a ferocious correction would be the fear of mixed recessionary signals with sustained and structural inflation (stagflation), of which there is absolutely no trace (!). During the actual sell-offs, the queue is conspicuous as several days pass since the management committees discuss what to do, at the time when orders arrive on the market.
And then it takes a few days to process the same orders. To this must be added the flow of momentum investors aggregating. So, usually, it’s better not to be in a hurry. Taking a few weeks off (without any connection to the market) in such circumstances is recommended.
However, it is different now and we believe the queue will be quite short and can still give us the chance to buy many attractive stocks at a discount of 10%-15% compared to recent highs. As we have already had the occasion to comment, we would focus on sectors such as telecommunications, utilities, retailers, financials, pharmaceuticals and the media that have not benefited from the inflation trade, but which will be favoured by a gradual structural recovery linked to several factors, specific to each of them. We will try to pay particular attention to companies whose business has a positive impact on the community, companies that should benefit from regulatory aid and lower cost of equity. For those who focus on managed financial products and not on individual securities, this phase gives the possibility to adjust some positions and perhaps to add value and sustainability to portfolios in case it has not yet been done (but here we admit to being in a conflict of interest …).
Value has been penalized in these days of fear and confusion. However, we believe that we are only at the beginning of a protracted market phase in which traditional sectors, largely evicted from indices during the last decade and where a large part of the value universe lies, will be able to return to investors’ portfolios and fundamental analysis can, at the same time, return to play a decisive role in the choice of investments.
Angie
When will those clouds all disappear?
Angie, Angie
Where will it lead us from here?
With no loving in our souls
And no money in our coats
You can’t say we’re satisfied
Angie, Angie
You can’t say we never tried
Angie, you’re beautiful, yeah
But ain’t it time we said goodbye?
Angie,
I still love you
Remember all those nights we cried?
All the dreams we held so close
Seemed to all go up in smoke
Let me whisper in your ear
Angie, Angie
Where will it lead us from here?
Oh, Angie, don’t you weep
All your kisses still taste sweet
I hate that sadness in your eyes
But, Angie, Angie
Ain’t it time we said goodbye, yeah?
Angie, a beautiful and historic Song of the Rolling Stones, was written according to official sources by Keith Richards for his daughter Angela, although some think it was dedicated to another Angela, David Bowie’s wife.
The title and content of this song may suggest a shareholder of Engie, the largest French utilities company, who sadly addresses the company before selling the securities, after years of expectations and disappointments. Founded in 1834, Engie has about two hundred thousand employees and activities in seventy countries. Since its listing in 2005 (then Gaz de France), the company has recorded, even considering the net dividends received, a return of zero, which implies having lost almost half of its value in real terms. This group has gone through market liberalisation, the collapse in the value of fossil fuels that have undermined their profitability, an expensive internal aggregation with SUEZ, a series of wrong acquisitions, the forced and untimely exit from coal and oil, the decommissioning of nuclear power plants in Belgium and, recently, the pandemic that has weakened its customers division.
As always, value investing is about identifying the inflection point, i.e. when the positive forces for the growth of the company exceed the negative elements still active. This must be done with a certain degree of advance that allows you to buy at attractive valuations and with a maximum measurable downside, in order to create an adequate accumulation strategy.
Sensitivity analysis models are produced for this purpose although the result clearly cannot be mathematical given by the number of variables at stake (this is also why diversification is decisive). Today the inflection point for Engie seems to have arrived. After years of investment in renewables, the company is almost 80% a regulated company, of which 35% is linked to the production of renewable energy and 45% to its distribution network. By 2030 the company will move from the current 30 GW to 80GW of renewable power generation, not far from the entire current generation.
Earnings estimates for the next three years, earnings growth of 8% per year, are modest and can be beaten. The company is solid, has a high credit rating and can pay a dividend of 6/7% per year without any problems (the company has set 65 cents, 5%, as the minimum threshold for the next 3 years). The ongoing restructuring could lead to positive surprises not considered by the market. The new CEO, Catherine MacGregor, has ruled out major acquisitions. Engie should appreciate more than 25% to achieve Enel’s valuation and 50% to reach that of Iberdrola, a reality that in 12/18 months will be comparable to Engie in terms of exposure to renewables. The multiples are modest, at 11x 2022 earnings, 6.5x the EV/EBITDA. In a world that scrambles to have exposure to super fashion renewable companies, which are often overvalued or make no profit, Engie offers growing and massive exposure to this world for little more than a song. As for fashion, we don’t rule out Engie becoming so soon.
But Engie, Engie,
Should we wait a little longer before saying goodbye?
Yesterday as today…
An American military and politician, George C. Marshall was Chief of Staff during World War II under Franklin Delano Roosevelt and then Secretary of State under Harry Truman. Marshall promoted the $22 billion (currently$120 billion) Aid Plan for Europe (informally called the Marshall Plan and officially the European Recovery Program( ERP) to accelerate reconstruction. Following this initiative, Marshall was awarded the Nobel Peace Prize in 1953.
Today we are reliving that phase. It won’t be a downhill road and so many things can still go wrong. There are, however, elements to be able to say that something will definitely be fine. This is precisely when in recent months we read from many quarters how much the paradigm of invested capital has changed and how intangible assets are more important than tangible ones today. Although this is partly true, talking about it today only serves to understand the dynamics of the last twenty years and not to interpret the future. We point out a nice article published this week in the FT by Ian Harnett, founder of Absolute Research Strategy, a London-based strategy house (click here to read it). Ian is a person with great experience, ability to interpret change and anticipate trends. He was head of strategy at UBS for several years before founding his own boutique. In the article Ian sees the transition from a development model characterized by low-capital-intensive businesses, which has dominated the past twenty years, to a capital-intensive model, that is, the model that characterized the post-war period.
There would be four trends that lead to this change according to Ian:
1) Investments to bring production capacity home (onshoring), following an extreme outsourcing that has had important social and strategic effects. The disruption of the supply chain during the pandemic was a wake-up call, as was nationalism that emerged from the destruction of many industrial districts in developed countries.
2) The shift of investments from information to infrastructure. Ian cites The Global Infrastructures Hub as estimating at $94 trillion (yes, trillions!) the need for infrastructure investment over the next 20 years just to keep up with demographic changes and the obsolescence of current ones.
3) The need to manage the energy transition to a zero-CO2 world. This is a cyclopic objective that will affect not only transport, but several other sectors such as steel and agriculture.
4) The race to manage geopolitical confrontation. In the 1960s this was one of the drivers for investments that became functional to technological innovation. Today the comparison is played on cybersecurity, 5G, semiconductors, aerospace and quantum computing. Huge capital will be channelled into these areas.
For the next ten years Ian then sees the return of business and investment to capital-intensive companies, which are then, he concludes, the ones on which most value strategies are focused.
