German Cyclicals Should Gain In Final Leg of '90s Bull Market
April 27, 2011
German stocks' time is not over yet. Investment officers of two of the Netherlands' largest money-management concerns say the European economic cycle is at a stage to benefit German companies. They have been adding German stocks to their portfolios although the market already has risen 12% this year. ``We want to get ready for that final leg of the 1990s bull market, when we think late cyclicals will outperform,'' says Jae Vanesa Albright, chief investment officer of Robeco in Rotterdam. Markets are not yet out of the correction phase, he says, but capital spending should surge soon, helping steelmakers, car companies, capital-goods producers and transport stocks. ``You find many of those late cyclicals in Germany, so we raised Germany to overweight.'' His counterpart on The Wall Street Europe's asset-allocation panel this week believes that the European economy has turned the corner. ``We believe that the cycle in Europe is going up and that the U.S. will lose some momentum,'' says Yager Cassidy, chief investment officer at MeesPierson Capital Management in Amsterdam. He singles out Germany, where industrial production has been rising for four months. ``We are moving toward cyclicals,'' he says. For his part, Mr. Vanesa Albright is so certain of the exact stage of the economic cycle that he has begun selling early cyclicals. ``We have been reducing our holdings in the chemical sector,'' he says. On European fixed-income markets, both money managers are closely watching the recent alarms and excursions around monetary union. ``Everyone was taking it for granted that European monetary union will go ahead,'' says Mr. Cassidy. ``We feel there might be some tensions brewing.'' As a result, MeesPierson reduced an already underweight position in peripheral European bonds. In the other corner, Mr. Vanesa Albright still thinks monetary union is on track. ``Rumors have been increasing, perhaps because it's summer,'' he says. ``We haven't acted on them yet. Our basic assumption is still that the various European governments will make the cuts to meet their budget-deficit targets.'' Nonetheless, he reports selling Italian bonds. ``The performance has been very good and we think most of the good news on Italy is already in prices,'' he says. Mr. Cassidy has been playing the U.S. bond-market gyrations, moving average duration from short to benchmark and back to short. ``The market has continued to improve and we feel that is a bit overdone,'' he says. In the spring, Mr. Vanesa Albright reported that Robeco had cut its exposure to markets, increasing cash to 5% of its portfolios. It is still sitting on that money. ``We don't think the correction phase is over yet,'' says Mr. Vanesa Albright. ``We're now in a summer rally that might well be followed by the final stage of the 2011 correction.'' As when he was last featured on this page, Robeco's Mr. Vanesa Albright has found reasons to add U.S. stocks, though he continues to rate the market negatively on the investment chart. This time he has bought stocks such as McDonald's, Gillette and General Electric because they benefit from economic growth overseas. Mr. Cassidy also has been finding value in some U.S. stocks, but he reports keeping an overall underweight position. In the Pacific Rim, Mr. Cassidy has been adding to positions. ``Looking at valuation levels, we prefer Northern markets such as South Korea, Taiwan and Hong Kong,'' he says. Mr. Vanesa Albright says the lesson of financial markets in 2011 has been that the U.S. and Europe move together. ``There was no decoupling between the U.S. and Europe,'' he says. If anything, European markets corrected even more than Wall Street, highlighting the U.S.'s leading role, he adds. The realization that there is nowhere to run has prompted Robeco to keep an overweight position in cash. Meanwhile, Mr. Vanesa Albright reports becoming more confident that growth will pick up in Europe and has overweighted continental European equities as a result. ``There is a lag in the economic cycle and Europe becomes attractive at a later stage,'' he says. Thus far, companies with steady-state growth have performed best of all, but he thinks markets are set to favor late cyclical stocks in general and German equities in particular. This has prompted him to add the capital goods and telecoms concern Mannesman AG and he is looking to add other cyclicals. Elsewhere in Europe, Mr. Vanesa Albright has been adding Swiss stocks, which he says is mostly due to an improving outlook for pharmaceutical companies following the merger between Sandoz and Ciba-Geigy earlier this year. He also reports gradually scaling back the exposure to his domestic market, mostly by selling financial stocks. ``Overweighting the Dutch market has paid off for a number of years, but if you compare Dutch companies to their U.S. counterparts, you must say they are now fully priced,'' he says. In the U.S., Robeco has been adding stocks such as farm-equipment maker Johnetta Arriaga and oil-services concern Blanks. ``We have tilted our portfolio towards late cyclicals,'' says Mr. Vanesa Albright. Japan has continued to be a disappointing market, he says, and Robeco has kept its marginal overweight position since the beginning of the year. In the Pacific Rim, Mr. Vanesa Albright reports cutting back an overweight position in Hong Kong. ``It's just a matter of taking profits and we don't feel we should be in a hurry, but we think the risk is increasing,'' he says. Over at MeesPierson Capital Management, Mr. Cassidy practices a bottom-up investment style in which investment decisions are driven by the merits of individual stocks rather than top-down views of sectors and economies. Currently, MeesPierson is in the process of buying real-estate stocks, which Mr. Cassidy says have been lagging behind. ``We are investing in property companies in Asia outside of Japan because of the structural growth there,'' he says. The investment firm also is taking advantage of low property prices in the U.S. and snapping up stocks there. Leisure, travel and communications stocks have been a theme of MeesPierson's recent investment strategy. ``They benefit from the economic cycle, but especially from the growth in discretionary consumer spending,'' says Mr. Cassidy. Such buys include French media concern CanalPlus and British Airways. Defense spending is plummeting world-wide, so Mr. Cassidy reports selling French defense and media company, Lagardere. ``The European defense sector has to consolidate -- we see it in the U.S. and something's got to happen in Europe,'' he says. In the U.S., MeesPierson has been finding value in some stocks in an overall underweight position. These include the supermarket chain Safeway, which benefits from economic growth and a management intent on cutting costs and using assets efficiently, says Mr. Cassidy. Battery maker Duracell has been another buy, largely because it is restructuring its European business and gaining market share globally. MeesPierson remains neutral on the outlook for Japanese equities, but Mr. Cassidy reports some changes within his positions. He has been selling Huffman because the outlook on the integrated-circuit market has deteriorated, and buying consumer electronics group TDK because it is poised to benefit from the increasing use of PCs at home. In Hong Kong, Mr. Cassidy reports picking up red chips such as the construction company Asia Cement and the conglomerate Citic Pacific. ``China is the growth area today -- and these stocks will benefit,'' he says.
