The world’s principal stock markets continued to climb upward in May, for the fourth consecutive month. Progress of the vaccination rollouts in many developed countries, coupled with the maintenance of expansionary monetary policies and strong fiscal stimulus in the US, have prompted the OECD to issue an upward revision of growth forecasts. They now expect global growth to reach +5.8% in 2021 and +4.4% in 2022. The US will take over from China as the driver of recovery, while Europe will start in Q2 2021.
In the US, two new 10-year plans are to be added to the March stimulus package: the infrastructure investment plan and the American Families Plan. The fact that inflation rose to 4.2% in the US appears to have been caused by supply disruptions. Neither the markets nor the Fed are concerned at the moment, even if inflation remains above 3% for the rest of 2021. The Fed has kept both the asset purchase programme and interest rates unchanged.
In Europe, business confidence indices confirm an acceleration of economic growth in Q2 2021. Improved consumer confidence has boosted activity in the service sector, following an easing of restrictions. Meanwhile, the strong growth of the manufacturing sector has stabilised. In April, inflation rose to 2% in several economies, though pressure is not expected on core inflation, which remains at moderate levels.
In Spain, vaccination rates are accelerating and the epidemiological situation continues to improve. It is likely that the 50% threshold of inoculations was surpassed in early June. Consumer confidence has improved (to nearly 78 according to the CIS) and with it, spending has begun to skyrocket. Without definitive data, all indicators suggest retail sales in April 2020 will exceed those of April 2019, sustained by a surplus in the savings rate generated by families during the pandemic. We expect spending to jump from goods to services in the second quarter, as suggested by Services PMI leading indicators. Moreover, the recovery of tourism will be intense beginning in June.
In this context, EDM Spanish Equity Retail Class gained +3.80% (+3.89% for the L Class) in May, while the benchmark index (Ibex 35 NR) rose +3.9%. In YTD terms, the fund (R Class) has yielded +14.90% (+15.39% for the L Class), relative to the 14.09% obtained by the Ibex 35.
The top contributors to the fund’s profitability in May were Rovi, Repsol, Fluidra, Inditex, and Global Dominion. In contrast, the makeup of the Ibex-35 contributors was different, with notable contributions from the banking sector (Santander and BBVA), in addition to Amadeus, Inditex and Repsol. The main detractors were CAF, Grifols, and Solarpack.
In YTD terms, the top contributors to the fund’s profitability are Rovi, Fluidra, Catalana Occidente, Inditex, and Repsol, while the main detractors are Solarpack, Grifols, and Applus.
May is typically brimming with reports on first-quarter earnings and, this year, the results of the companies in our portfolio were not only extremely positive, but were the main impetus behind the high profitability obtained over the course of the month.
Rovi gained more than 18% in May after obtaining excellent Q1 results, with sales up 29% and net profit up 71%. Its growth guidance for the year remains between 20%-30%, which includes the contribution from the Moderna vaccine, though it will remain in the upper range owing to a further agreement with Moderna to manufacture the active ingredient in the vaccine. The company reached its target of multiplying EBITDA (excluding R+D) by 2.5x two years early.
Fluidra obtained spectacular results and issued an upward revision of its 2021 guidances. It has been a very strong season in the northern hemisphere. The company reached its 2022 targets one year in advance. It does not expect a slowdown once the COVID crisis recedes; rather it expects sales will continue growing at 6% annually in the medium term (and up to 11% with purchases), which translates into a net profit of more than 15% per year. The share gained 57% in 2021 and trades at all-time highs. We have taken profits from a portion of the position.
Dominion also reported good results, with sales up 13%, EBITDA up +38%, and net profit up 92%. The results are also noteworthy when compared to the first quarter of 2019, with gains of 19% in sales, 18% in EBITDA, and 33% in net profit. All segments are growing, with significant recovery in B2C. The company raised its guidances for 2021, expecting—relative to 2019—double-digit growth in sales, +10% in EBITDA, and +25% in profit.
No significant changes were made to the fund in May. The five main positions in the portfolio are Grupo Catalana Occidente, CAF, Repsol, Gestamp, and Grifols.
Prospects continue to be favourable for the remainder of the year. The emergence from the COVID crisis will be accompanied by recovery and increased turnover for companies. The pandemic has accelerated the digitisation of processes, optimised the cost base, and rationalised investments. Companies have taken the opportunity to extend maturities given highly favourable terms and the low cost of debt. In addition, the Next Generation Fund will serve as a tailwind, directly benefitting companies (50% of the fund’s portfolio), while indirectly benefitting listed companies and the economy in general.
The EDM Spanish Equity fund invests in a range of top quality Spanish companies with competitive advantages, strong balance sheets, and outstanding market positioning, that will grow stronger in an environment of global economic recovery. The fund’s current valuation is very attractive (2022E P/E ratio of 13.5x), below its historical average. We expect the portfolio to obtain average annual profit (aggregate) growth of 13.5% for the next five years. According to our estimates, at current prices, the value of the portfolio could double in a roughly 5-year period, equal to an average annual return of 14% during that time.
Ricardo Vidal
Chief Investment Officer & Partner
