The first quarter of the year continued strong for equity markets, with the MSCI World index gaining 5.9% and Asia also up 13.4%, but the best performance came from Europe, where markets overtook the US, ending the quarter with a rise of 6.7%. By strategy, Value again lagged Growth by over three percentage points, but strong dynamics helped European smaller companies outperform larger companies by nearly three percentage points. Within Europe, the previous trend was reversed, with a subdued performance from Northern Europe and a strong rally from Southern Europe: Italy was up 8.4%, Spain up 9.5% and Portugal up 7.7%. After a solid end to 2016, growth is gathering pace in 2017.
If there are no major negatives, we could see some positive growth surprises in Europe this year. If interest rates and bond yields rise it will most probably be because economic growth is recovering. This will have only limited impact on Growth companies which were already developing strongly without the help of the economy, but it may boost some of the more cyclical Value plays, as corporate confidence reaches a six year high.
We like the Italian gardening equipment and pumps maker Emak, which has risen 65% on the back of a 20% rise in net profits for last year. The company is still 75% owned by seven families from the Bologna region. It has been implementing the full range of ‘Lean Manufacturing’ processes since 2015 and this should feed through to higher margins in the years to come. It has also been better managing its working capital and reducing its debt, enabling it to embark on a very large accretive deal with local peer Lavorwash.
Another share that has done well is the German construction equipment maker Wacker Neuson which rose 36% over the quarter as the company, known for its conservative guidance, gave a much more upbeat outlook for its businesses in 2017. The firm is the result of the merger in 2007 of concrete and soil compaction specialist Wacker (belonging to the 5th generation of the Wacker family who founded the company in 1848) and compact equipment maker Neuson Kramer, founded by entrepreneur Johann Neunteufel in the 1980’s. It notes that clients have started reinvesting in construction machines and this gave them confidence for higher sales and greater margins this year. The company also has the kind of structure most beneficial to other minority shareholders: the long term vision of family shareholders via a supervisory board, combined with the best external professional operational managers, and the transparency and accountability requirements of a listing. We expect 2017 to be a very strong year for Wacker Neuson in Europe and in the US, where it should be a beneficiary of the substantial investments in infrastructure earmarked by the Trump administration.
Other European companies we like include Italian woodworking equipment maker Biesse, Swedish natural cosmetics company Oriflame, and Italian home automation company NICE spa. Biesse, which is still 51% owned by the Selci family, rose 33% over the quarter on the publication of strong figures for 2016. Sales grew by 19% as clients from woodworking factories increased orders to reinvest in their production equipment after years of underinvestment.
Oriflame rose 31% as the company published a doubling in net profit and gave an upbeat outlook statement for 2017 with continued strong growth in Asia.
NICE spa, which makes motors and mechanisms for gates and rolling shutters, rose 30% after the company published sales growth of 11% last year. The company is completely off the radar screen for investors, having published uninspiring results over recent years with the two main markets of France (company specific distribution problems) and Italy performing badly.
We continue to focus on small and medium sized European companies operating established businesses, that are listed but still partly owned by family shareholders to select undervalued companies with attractive prospects.