Russia’s unexpected invasion of Ukraine adds further uncertainty to the beginning of 2022. As the Omicron variant recedes and market debates shift to the expectation of impending interest rate hikes, a new black swan event emerges in the form of Putin’s military offensive in Ukraine.
Europe is affected by its geographical proximity to the conflict and the continent’s energy dependence on Russia (which supplies nearly 40% of all EU gas imports). However, direct impact on the European economy is minimal, since exports to Russia and Ukraine account for only 1% of European GDP; generally speaking, companies from the countries closest to Russia are the most exposed (Germany, Austria).
Russia plays a very important role in the energy market. Fallout from the conflict has caused gas and oil prices to spike, resulting in greater inflationary tensions.
For its part, Spain is not particularly dependent on Russia in any major sector of its economy (Russian exports account for only 0.17% of GDP). Ukraine is a bit more influential (Europe’s main supplier of corn and sunflower crops), though its impact remains limited.
On the other side of the Atlantic, markets expect that by late March, the Federal Reserve will begin to withdraw bond purchases and gradually increase interest rates. Recent events may delay the implementation of a more restrictive monetary policy. In Europe, by contrast, the market has ruled out the prospect of rate hikes.
Recent corrections have positioned our fund portfolios at very attractive valuations, with companies releasing outstanding earnings reports. This is the case with companies like CAF (with record EBITDA and order book levels at the 2021 close), Gestamp (continuing to gain market share and generate ample cash flow), Coca-Cola Europacific Partners (with strong pricing power and organic growth) and Fluidra (with a historic year of earnings growth, doubling net profit).
Energy costs and higher inflation will affect companies. However, given their elevated quality, the majority of our companies have pricing power and will therefore be able to transfer any cost increases to their customers.
In our view, the recent punishment of quality companies is an excellent opportunity to invest in a fund like EDM Spanish Equity. We remain confident in the companies included in our portfolio, which begins 2022 with a winning selection of securities in terms of quality and valuation. It trades at an attractive 2022 P/E ratio of 12.9x, near historic lows. Based on current prices and our profit growth estimates for the portfolio overall (+14% annually), we expect the fund could double its net worth in five years.
Ricardo Vidal,
Chief Investment Officer
