The main stock markets closed October with material gains, reversing September’s losses. In Europe, the MSCI Europe rose +4.54%, while in the US, the tech-heavy Nasdaq jumped +7.27% and the S&P 500 gained +6.91%. Meanwhile, emerging equity markets closed the month with a -5.38% return, according to the MSCI LatAm Index (USD), and +1.13% gain as per the MSCI Emerging Markets.
The skyrocketing price of energy, raw materials, and logistics, as well as their impact on inflation rates, made headlines again in October. Rebounding inflation appears to be a temporary phenomenon, attributable to the strong, swift recovery of activity after the 2020 crisis. However, core inflation rates (excluding food and energy) remain at moderate levels. In any case, central banks worldwide maintain their expansionary policies and seem more concerned with recovery than inflation.
In Europe, most confidence data remain very positive and the ECB’s stance is unchanged, reaffirming the strong economic recovery of the euro area, which will exceed pre-pandemic levels before year-end. In turn, an accelerated uptick in demand has put pressure on supply chains and affected energy costs. In addition, the labour market continues to improve and inflation-rate spikes are expected to be temporary. The pandemic emergency purchasing programmes (PEPP) will conclude in March 2022, as planned, and no rate changes are anticipated in the medium term.
Spain’s healthy economic activity continues, as demonstrated by increased investment in capital goods, an upswing in spending, and the strong evolution of exports. High growth in services persists and job growth continues to improve month-by-month. With regard to inflation, while the overall rate has escalated (+5.5%), core inflation remains moderate (+1.4%). The health environment has evolved favourably and the excess savings accumulated by households during the pandemic will help kick-start spending in the short and medium term.
In this environment, EDM Spanish Equity obtained a return in the year of + 13.08%, while the return on the Ibex35 NR was + 14.27%. The main contributors to the fund in October were Gestamp, Endesa, CAF, Rovi and Cie Automotive. On the other hand, the main contributors to the index have been Iberdrola, Santander and BBVA, which have contributed all the profitability obtained by the Ibex-35 this month. The main detractors of the fund have been Grifols, Prosegur Cash, Coca-Cola Europacific and Applus.
In YTD terms, the top contributors to the fund’s profitability are Rovi, Fluidra, Repsol, and Inditex, while the main detractors are Grifols, Prosegur Cash, Applus, and Endesa.
In the last week of October, many Spanish companies published their Q3 results. The two companies representing the automotive industry, Cie Automotive and Gestamp, delivered positive surprises. Despite a sharp decline in the volume of cars manufactured in Q3 due to the semiconductor shortage, both companies outpaced the market in terms of growth, gained market share, maintained margins, generated cash, and reiterated their guidances for 2021. Lower volumes are attributable to supply shock, but demand remains strong and the vehicle fleet is aging (in Spain, the average lifespan is 13+ years), such that in the next two years the sector may rebound considerably.
Also worth noting are the results of Catalana Occidente, which were 17% higher than those obtained in the first nine months of 2019. Credit insurance results were very good and low accident rates were a positive surprise. Contracting has also increased at prices higher than pre-pandemic rates. In traditional insurance, growth is much more moderate and somewhat below the sector average, despite good profitability ratios (combined ratio of 88%). The share is economical: it trades at a 2022e P/E ratio of 8.5x with a dividend yield greater than 3%.
In October, we liquidated the entire position in Telefónica. The share recovered much of its potential this year and competition in its main markets, particularly in Spain, remains fierce.
The five main positions in the portfolio are Grupo Catalana Occidente, Repsol, CAF, Gestamp, and Inditex.
Despite short-term movements and flows shifting toward the financial and electricity sectors, we remain confident in our portfolio companies given the strength of their businesses, their recent earnings reports, and their attractive valuations, all indications of outstanding returns in the medium term.
We remain confident that the companies included in EDM Strategy will emerge from the crisis stronger in their positions as industry leaders. We believe that with a portfolio of leading, global companies with competitive advantages and strong balance sheets, the fund is well poised to continue generating good returns in the coming quarters. The current portfolio offers historically attractive valuation and growth: annual EPS growth of +14% CAGR, 2022e P/E ratio of 13x, and an annual IRR of nearly 15% for the next five years.
