European markets were volatile during January. Starting the year on a positive note, markets rallied ahead of the first phase of trade deals being signed by the US and China. However, the general optimism quickly vanished as the Coronavirus began spreading in China. At present, it is obviously too early to know what effects the virus will have on global growth, but markets have sold off since the middle of the month. Economically sensitive sectors have performed poorly, while more generally defensive areas of the market, especially Utilities held up best.
The fund was lower over the month. The fund currently has no holdings in sectors such as Utilities and Telecoms, where we are uncomfortable with either high debt levels, long term structural issues, or simply overvalued cashflows. This can lead to poor performance when there is a defensive flight in markets such as occurred in January. However, we are committed to retaining our valuation discipline, looking for undervalued cashflows, plus our aversion to highly financially leveraged businesses.
In terms of positive contributors, CPL Resources, a Dublin based recruitment business reported very strong results, good cash generation, and the shares reacted positively. Swedish Match, the Scandinavian tobacco company specialising in smoke-free tobaccos, and tobacco-free nicotine pouches also performed well. The fund’s semiconductor holdings – ASMI, BE Semiconductor and ST Microelectronics all enjoyed a good month in terms of share price performance. Both ASMI and ST Microelectronics produced results which were ahead of market expectations.
On the negative side, holdings in Oil and Oil Services were weak, including Saras, TGS Nopec, Total and Subsea 7, led by sharp falls in the oil price due to the likely demand effects of the Coronavirus. We continue to see good value in these areas. Group SEB, a cookware and kitchen appliance business was also weak largely due to its exposure to the Chinese domestic market. Post NL, the Dutch postal services company was also weak over the month as enthusiasm for the Sandd acquisition gave way to short term concerns on the cost base effects of legislation on its parcels business.