Value Column von Hans Peter Schupp
04 SEPTEMBER 2024
Stock market top – economy flop
Hans Peter Schupp, Managing Partner of Fidecum AG and portfolio manager of the Contrarian Value Euroland Fund (ISIN: LU0370217092) on the apparent contradiction between record Dax prices and poor economic sentiment.
On Tuesday, September 3, the German share index DAX reached a record high. Almost simultaneously, economic researchers predicted a gloomy future for German industry. There is talk of a “nosedive”, of a “free fall”. How does this fit together?
Stock markets must always rise
First of all, all-time highs on the stock markets are nothing special. On the contrary: they are the rule, not the exception. Real growth and price increases mean that turnover and profits in the corporate sector increase continuously over time. Data from the USA shows that since January 1926, the US stock market has reached a new high around 30 percent of the time on a monthly basis. That’s the way it has to be. As long as our economic system lasts, the prices of a broad share index must continue to rise.
For me, the performance of small and medium-sized stocks in Germany is therefore more sensational. The MDAX would have to rise by a spectacular 38% and the SDAX by 27% to reach a new record high. This shows the full extent of the pessimism in share prices. And this is clearly where the greater opportunities lie today.
The big opportunities lie outside the DAX
Of course, the economic situation in many German industrial companies is poor. However, anyone investing with a view to the coming years would do well to take a sober look at the economic situation beyond gimmicky headlines. Is there really no hope of improvement?
Two points in particular are always cited as a burden. Firstly, Europe is crippling its economy with excessive bureaucracy. That may be true. However, the issue of regulation seems to me to run in waves. Before 2008, the pendulum had swung in the opposite direction, particularly in the banking sector – with unpleasant consequences. Today, on the other hand, we have too much regulation. In the medium term, we will probably find a middle way in which we concentrate on setting targets instead of prescribing rigid measures as in the past. From today’s perspective, that would be more of a plus for companies.
Warehouse effect should stimulate future
The second problem is that many German industrial companies – especially in the automotive, chemical and mechanical engineering sectors – are suffering from a slump in orders. This is usually blamed on the problems in China, the most important sales market, which has not yet overcome the hangover after its massive construction and infrastructure boom.
However, a further aspect crystallized in discussions with entrepreneurs. Following the supply chain problems of the past, many customers have built up huge inventories over the course of 2022 and have therefore ordered much less than usual in the last six quarters. But at some point, the warehouses will be empty. And then the mood in the industry should also improve again.
If the order situation returns to normal, European companies in particular are well positioned for an upturn. Unlike in the USA, balance sheets were restructured and debt reduced after the 2008/2009 financial crisis. In terms of debt, companies have now returned to the level of 1990. They are in a position to easily carry out expansion investments, buy back shares or pay higher dividends in the future, all of which would be good news for their shareholders. All that is needed is an initial spark. Where could that come from? How about an easing of tensions in the current crisis regions of the world, a turnaround in growth policy in Europe, a turnaround in China or an AI-driven innovation boom?
European second-line stocks benefit from the next upswing
In our view, a positive development is much more likely than a further slide of the European and especially the German economy into crisis and stagnation. We have therefore already positioned ourselves accordingly in our Contrarian Value Euroland fund.
One example is Salzgitter AG (ISIN: DE0006202005). At just under 900 million euros, the company’s market capitalization is currently at the same level as 20 years ago, although sales have tripled since then. The 29.9% stake in copper producer Aurubis alone is currently worth around one billion. If this were to be distributed to shareholders, the Salzgitter share price would have to turn negative. Of course, this is just a thought experiment, but it shows how much skepticism investors currently have towards the company. The preconception is that there is simply no money to be made with steel in Germany. However, this was definitely not true in the past. In the last 20 years, Salzgitter has generated 3 billion euros in retained earnings and distributed a total of 620 million euros. The fact that Salzgitter has long since set the course for the production of “green steel” on a significant scale could have a positive effect in the future. However, this is also prompting skeptics who doubt whether the company can cope with the investment volume of over 2 billion euros. They ignore the fact that the company is receiving a billion euros in subsidies for this transformation – effectively a gift to the shareholders in the amount of the current market value. For us, Salzgitter is a very well-managed steel company with a solid balance sheet, good business prospects and an extremely low valuation and fits perfectly into our investment pattern.
We do not change our logic
With our Contrarian Value Euroland Fund (ISIN: LU0370217092), we have remained true to our investment philosophy for 25 years. We invest in undervalued companies with potential and a comprehensible business model. In doing so, we act like an entrepreneur who wants to buy the entire company and deliberately swim against the prevailing market opinion.
About the author: Hans Peter Schupp, Managing Partner of Fidecum AG and portfolio manager of the Contrarian Value Euroland Fund.
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