Value Column von Hans Peter Schupp

12 AUGUST 2024

Volatility, risk or opportunity?

Hans Peter Schupp, Managing partner at Fidecum AG and portfolio manager of the Contrarian Value Euroland Fund compares share Prices and real value of a company.

„Nikkei, Dax, Dow Jones – the big quake“ was the headline in German tabloid Bild on August 6, 2024. Double-digit losses on many stock markets within a few days then also led to a hectic search for explanations in less headline-grabbing gazettes. The escalation in the Middle East. Some disappointing quarterly reports. The strong yen, which forced those who had bought on credit and borrowed in the low-interest currency yen to sell. Weak employment figures in the USA, which stoked fears of recession. None of this was really new. Only Donald Trump fantasized a current reason. In his opinion, it was the nomination of Kamala Harris that caused the 12% slump in share prices in Japan.

Ultimately, as has often been the case, we do not know the exact trigger. It is likely that many investors simply wanted to sell after a long phase of steadily rising prices. And buyers could only be found at lower prices.

What I find interesting is how indiscriminately the price slump took place across all markets, sectors and individual stocks. It is reasonable to assume that this has something to do with the success of the ETF industry. When ETFs are redeemed by investors, their managers have to sell all the shares contained in the respective index. And they do so regardless of the fundamental data. If many investors act in this way, this can result in considerable selling pressure. Prices fall sharply and even more investors want to sell. And the wheel keeps turning.

I have never really understood why shares are always sold massively after they have fallen in price. And they are particularly bought after they have risen significantly in price. In everyday life, these investors act quite differently. They would never buy sweaters if the seller announced that he had just doubled the price. Instead, they prefer to wait for lower prices during a sale. For me, the big quake of the last few days was a kind of summer sale. Many shares of solid, promising companies were pushed down with them. These are special opportunities.

My job as a fund manager is to analyze which companies are solid and promising. A good example of this is Lanxess, a leading company in the chemical sector that specializes in specialty chemicals such as synthetic rubbers and additives for various industries. As these products became very scarce after the coronavirus crisis, Lanxess‘ customers overstocked their warehouses in 2022 to ensure production capacity. This initially led to an increase in sales at Lanxess in 2022, followed by a slump in sales the following year. This was interpreted by many observers as a structural break. According to the opinion, the chemical industry has a long-term sales problem and Lanxess will never be able to return to its „normal“ sales trend again.

In fact, we have different opinion. Just as a glass of beer is empty at some point when it is drunk from, the stocks are also empty at some point. Then new products have to be ordered. In fact, Lanxess‘ latest quarterly figures have already hinted at this turnaround. Analysts‘ expectations were clearly exceeded. As a result, the share price performed well until the stock market quake. However, it then came under significant pressure again and lost up to 20 percent in value. For us, such movements are exceptional opportunities.

There will probably be more such opportunities in the coming days and weeks. In view of the uncertainties in the economy and geopolitics, fluctuations on the stock markets could remain high. It is then crucial to have a clear opinion on the long-term prospects of a company. I am prepared. And I’m looking forward to an exciting, busy fall.

In our investment approach, which has been tried and tested for more than 25 years, we look for undervalued companies with understandable business potential. In doing so, we invest like an entrepreneur looking for opportunities, even if this means going against the prevailing market trend.

Convenience translation only!