Value Column von Hans Peter Schupp

4 JANUARY 2024

2024: Interest rate joys and economic concerns

All in all, 2023 was a good year for equities and met our expectations. It may have been nerve-wracking, but the markets have recently turned positive again, so we can look to the new year with optimism. But not too optimistic, because there are still some dangers lurking in 2024.

Interest rates down, economic concerns remain

Let’s start with the positives. If interest rates are the natural enemy of equities, the enemy will be less powerful in 2024. Inflation has eased and interest rates are widely expected to fall, even though ECB chief Christine Lagarde keeps emphasizing: „We have not talked about interest rate cuts.“ Not yet, it would be better to say. Be that as it may, according to a Reuters survey, European stock markets will record a modest rise in 2024 as optimism that global interest rates have peaked is offset by concerns that the economy could fall into recession.

In Germany in particular, the economic outlook has recently deteriorated further. The latest leading indicators point to a continuing economic slump. Most recently, the purchasing managers‘ index was disappointing, particularly in the service sector: Instead of the expected slight increase, there was a moderate decline in the index, signaling a contraction of the economy in the coming months for both industry and the service sector. But Germany is only one part of Euroland. Things are looking better for equities in the eurozone. One thing in particular is making people sit up and take notice: European companies are becoming increasingly international.

Europe is becoming increasingly international

In 2006, the companies in the STOXX 600 still generated 60 percent of their turnover in Europe and 40 percent in other regions. However, according to calculations by Deutsche Bank, the ratios have now reversed – the proportion of non-European sales is higher than ever before. This internationalization is due in particular to the expansion of European companies in Asia. The proportion of sales generated there has doubled to 20 percent in the same period. This makes Asia the second most important non-European region after North America – i.e. the USA and Canada, where STOXX 600 companies generate 25 percent of their sales. The companies in our Contrarian Value Euroland fund, which is one of the best funds in its peer group with an increase of 18.6% since the beginning of the year, are also benefiting from this.

But what is important when selecting stocks for the coming year? The portfolio should be as weatherproof as possible, as it can be assumed that the markets will have to expect bumps and setbacks again in 2024. The following criteria are therefore important for us when selecting stocks: a healthy balance sheet quality, created by retaining profits, which is also reflected in the cash flow. These are usually family-owned companies with a long tradition that have survived many a crisis and are not interested in a rapid increase in the share price. They should have a very solid balance sheet. And it is ideal if these companies are active in an oligopolistic market.

Savencia: Cheese, nothing but cheese!

A good example of this is the French dairy group Savencia, which is all about cheese and other dairy products. With a turnover of around 7 billion euros, SAVENCIA Fromage & Dairy employs over 21,500 people worldwide. Its products can be found in 120 countries, including Brazil, the USA, Japan, China and throughout Europe. In Germany, the company is even the market leader with varieties such as Geramont, Bresso, Fol Epi and Milkana. The company is family-run. The Bongrain family holds 58.5 percent of the capital of Savencia SA via a holding company and guides the Group with a steady hand through all the economic ups and downs. With a P/E ratio of 8, the share is not highly valued either.

This is just one example from the Contrarian Value Euroland fund. But with an average portfolio P/E ratio of between 5 and 6 and a price-to-book ratio of 0.6, we believe we are well positioned, even if we will certainly experience many ups and downs again in 2024.

Translation for convenience only!

The author: Hans Peter Schupp is a board member of FIDECUM AG and portfolio manager of the Contrarian Value Euroland fund.