Forget the Nifty Fifty-style European stocks, says Frédéric Motte of Focus Asset Managers, the next wave to watch out for is companies in line to profit from a surge in M&A activity.
Speaking to Citywire Global at his offices in Paris, the former Citywire AA-rated manager said that after four years strongly allocating his Focus Europa fund towards the Nifty Fifty stocks he has been selling them since March.
‘Today they are still good companies but everyone knows about it,’ said Motte, who launched his own boutique last year with colleague Jérôme Archambeaud after an agreement with former employer SPGP Gestion to hold onto his Focus Europa fund.
‘So over the last 6 months we have been going out of the Nifty Fifty stocks and going into companies that still have exceptional business models, cheap valuations and good exposure to the emerging markets.’
Companies like beverage groups Anheuser-Busch InBev and Pernod Ricard are now out and instead he is opting for smaller companies like Swiss firms Clarian and Hayes.
Back in September Philipp Vorndran, former chief strategist at Flossbach von Storch, said that the Nifty Fifty stocks had not yet seen the end of their revival and were still worth holding.
‘I think the next wave in the coming 18 to 24 months will be a growing number of takeover in specific industries,' said Motte.
Around four years ago the French boutique manager's exposure was around an 80-20 split between large and mid-caps in his fund but he has been repositioning it so that it is now an even 50-50 between both market caps.
‘We have more of a private equity approach than before. It was a once in a lifetime case with Nestlé and InBev trading at these prices so we sold out.’
‘Over the last four years there’s been very little acquisition. Things have calmed down in Europe and the US we can see who has survived the crisis and who has restructured their business.’
He has even recently hired a private equity analyst to come and bolster his investment team.
The emerging consumer was the fuel behind the Nifty Fifties, said the French boutique manager, The slowdown in China has already been priced into many of the top European stocks.
The current environment is more a business as usual phase, said Motte, and for many unique and niche businesses the best way to go in to the emerging markets will be to buy their fellow companies.
One such example that is likely to be on the receiving end of such activity was Joy Global, a leading US mining equipment company which Motte bought at the end of last month.
His fund’s strategy allows for a 10% exposure outside of Europe and this is the only one he has in portfolio at present. There were rumours that General Electric was going to bid for it and its potential has also caught the eye of other firms.
The chemical industry is also top of his shopping list, especially those companies linked to the mining equipment sector.
‘Commodities have been expensive for the last ten years but now their value has gone down. It is hard to get market share in the chemical sector unless you buy another company.'
‘There will be consolidation coming up.’
After launching his own boutique last year, over the past twelve months the Focus Europa fund has returned 22.8% while the Stoxx Europe 50 CR benchmark has risen 16.6%