Value Column von Hans Peter Schupp
9 DECEMBER 2024
2025: It will work out fine
Hans Peter Schupp, managing partner of Fidecum AG and portfolio manager of the Contrarian Value Euroland Fund (ISIN: LU0370217092) about opportunities and risks for equity investors in 2025.
“New shock forecast for our economy” was the headline in the Bild newspaper on December 5, referring to a forecast by the German Economic Institute, according to which growth of just 0.1% is expected in Germany in 2025. There is hardly a news program without a report on the crash of the automotive industry. And even the ifo Institute writes: Competitiveness of the German economy in free fall?
It almost seems as if the German economy is on the brink of a massive collapse. But isn’t this picture too bleak? We tend not to exaggerate things. Of course, stagnation is no good news but it is also no reason to fall into depression. The weak industry, to which the bad news refers, only accounts for 20% of value creation. The fact that industrial leaders restructure in a difficult situation is their job and is part of the economic cycle. Anyone reporting on the German economy in a well-balanced way should actually also mention that the downturn in the manufacturing industry is at least being offset by an increase in the service sector.
When the night is at its darkest, …
There are now even increasing signs that German industry may have reached its low point in 2024 and will slowly recover again in 2025. Further interest rate cuts by the European Central Bank are expected on the capital market over the next twelve months. Lower interest rates should stimulate investment and thus demand for industrial goods. There could also be a change in sentiment following the new elections at the end of February. 50 percent of the economy – as we have known since Ludwig Ehrhard – is psychology.
Our personal leading indicators are in the chemical industry. Recoveries there have already indicated the turning point in many previous cycles. When we talk to companies in this sector today, they report increases in production and even the pessimists at the German Chemical Industry Association point out that empty warehouses are leading to an increase in production. For us, this is an indication that, finally, it’ll work out fine.
Many stocks offer opportunities with a view to 2025
If this assumption is correct, there should be plenty of opportunities for equity investors in 2025. However, it is important to take a close look. Companies that delivered growth last year were in high demand and are therefore highly valued today. In contrast, the second-line stocks segment, to name just one example, is valued more favorably than it has been for 20 years. These companies are characterized by above-average interest rate sensitivity and a high dependence on the domestic economy. If the economy stabilizes and key interest rates fall as expected, they should benefit.
We currently find a lot of shares with price/earnings ratios of less than 10 – based on depressed earnings in 2024. Even if this level of earnings can only be maintained in the future, an investment
in these stocks will yield 10%, which can be reinvested or distributed for the benefit of shareholders. This compares with fixed-term deposit yields of around two percent. After 10 years, 1000 euros invested will become 1022 euros. An investment with a ten percent return, on the other hand, increases assets from 1000 to 2590 euros – even if the profit of the respective company stagnates over the next ten years.
If you think long-term and are not afraid of short-term fluctuations, you should not have to think long about which investment is better today.
VW a good example for a P/E yield below 10
At Volkswagen (ISIN: DE0007664039) the public view and the fundamental situation are currently particularly far apart. In the perception of the public (and interestingly also according to the CEO’s statement at the works meeting), VW is a restructuring case. This is apparently also the view of most market participants. A turnover of more than 300 billion is now only matched by a market value of 42 billion euros.
In contrast, the forecasts published by the Group’s management in the nine-month report read far less pessimistically. “With regard to the operating result, the company expects to reach around 18 billion euros in 2024”. And: “Net liquidity in the Automotive Division is expected to be in the range of 36 to 37 billion euros in 2024.”
In other words, the operating result is only expected to deteriorate by 20% compared to the record year and will still be half of the market value. In addition, net liquidity is almost equal to the market value. The fact that this has fallen by around four billion euros over the course of the year also has something to do with the fact that the company paid out 5 billion euros in dividends. Based on all these figures, we calculate an EV/EBIT of 0.33, a P/E ratio of 4 and a dividend yield of 8% for 2024. Incidentally, according to securities analysts‘ estimates, profits and dividends are set to rise by around 15% over the next two years. We are and will therefore remain invested in VW.
Contrarian investing is a strategy in which investors deliberately go against the prevailing market trend. Instead of following the crowd, they look for opportunities in undervalued or unpopular assets where they expect a future change in sentiment. In many cases, 2025 could be such a year. We are prepared for this.
Our investment approach
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 – if necessary – deliberately go against the prevailing market opinion.
About the author: Hans Peter Schupp is a managing partner at Fidecum AG and the portfolio manager of the Contrarian Value Euroland Fund.
Convenience translation!
