Value Column von Hans Peter Schupp

1st MARCH 2024

Consumers well, companies well – what’s the problem?

The Eurozone economy is improving! This may sound strange to some, as the Eurozone economy stagnated in the fourth quarter of 2023 after shrinking by 0.1% in the third quarter. In 2023 as a whole, gross domestic product (GDP) only grew by 0.5%. The reason: persistently high inflation, high borrowing costs compared to the past two decades and weak foreign demand.

Industrial production on the rise, shares valued favorably

However, things could pick up again this year. As a first sign industrial production rose in December for the first time in nine months. The HCOB Purchasing Managers‘ Index for the Eurozone recently reached a six-month high of 47.9 points. Although it is still below the expansion threshold of 50 points, companies‘ growth expectations rose to their highest level in nine months. A growing economy should also be good news for the Eurozone stock market. It is currently trading at a price/earnings ratio of just over twelve – around ten percent below the average of the past decade and around a third cheaper than the MSCI World index of industrialized countries.

Dip instead of sharp recession

But there is something else to be optimistic about: in previous crises, we experienced a strong expansion before the crisis, followed by a recession, sometimes a sharp one, which only then slowly turned into a recovery. This time it’s different: expansion before the crisis, yes, but afterwards we only experienced an economic dip, no matter for how much longer it may last. Consumers are also holding up quite well. They have now become accustomed to the higher prices, but only now wages are also picking up – recently very significantly.

The situation is different on the corporate side. Companies are currently being written about badly in the press. The arguments here are bureaucratic obstacles, high energy prices and a shortage of skilled workers. However, if you look at the latest quarterly figures, the majority of them are positive. Nevertheless, politicians are talking down the German economy. The German government is lowering its growth forecast. But the figures speak a different language.

Foreign trade balance remains positive

One way of measuring the competitiveness of companies is the foreign trade balance! If exports outgrow imports, normally this is a good sign that companies are competitive. Although exports fell in 2023, imports fell even more sharply. The balance of payments is therefore positive. This is true for the Eurozone and even more so for Germany.

But: are the companies right in seeing themselves in the middle of the so-called inventory cycle? They currently hold relatively well filled buffer stock, but this situation cannot last forever. Depleting stock needs to be replenished. This might indicate that we only have a temporary problem, not a structural one.

Focus on cyclical stocks

Conclusion: Consumers are doing well, companies are doing well. As a consequence we have a clear focus on cyclical stocks in the portfolio of our Contrarian Value Euroland Fund. Particularly our portfolio stocks Lanxess, BASF, Salzgitter, Valeo and the French automotive supplier Plastic Omnium should benefit.

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.