European markets were weaker in August. The on-off nature of trade talks and the ensuing tariff escalation between US and China dominated market sentiment. Markets remained volatile, but ultimately were down over the month. In this environment, it was again the less economically sensitive areas of the market which held up better, with Consumer Non-Durables, Healthcare and Utility names leading the outperformers, as the market continues to reward security and visibility over cyclicality.
The fund was also weaker over the month. On the positive side, Post NL, the Dutch postal services business was up strongly, as results confirmed its outlook and it also paid an interim dividend which many thought would have been foregone. Bayer also performed well over the month as it announced disposals of two non-core businesses, Animal healthcare and its chemical JV, Currenta. Strong share price performances also followed positive results from Novo Nordisk and Lastminute.com.
On the negative side, TKH, a technology company with products focussed on smart manufacturing, connectivity and vision and security, had lacklustre results which were taken poorly by the market, sending the shares lower. The investment case in TKH remains intact, though there was a degree of travel and arrive as regards the share price performance. Into strong share price appreciation over the preceding months, we had reduced the fund’s position in TKH, as the short-term valuation became more stretched. We will add to the position on any further weakness.
Also notably weak over the month was Banco Santander, with Brexit fears being compounded by issues in Latin America. With the company now trading at a significant discount to book value, we believe that the recent weakness is overdone and have added to our position.
The fund made one new purchase over the month. Valmet is a leading supplier of technologies, automation and services to the pulp/paper and energy industries. Following a recent pull-back in the share price, the valuation looks very attractive – a free cashflow yield approaching 8%, a dividend yield of 4% and good growth prospects driven largely by the services business which should be resilient to any general economic weakness. It also has an ungeared balance sheet.
We exited our holding in Bolsas y Mercados over the month. The investment has been disappointing, and although there remains a reasonable case to own the shares from a valuation perspective, prospects for growth appear limited, and it was felt that better opportunities lay elsewhere.