Olivetti Chairman's Resignation Is Taken as Signal to Buy Stocks
May 18, 2011
European fund managers are waving their checkbooks in enthusiastic approval of Carlo De Benedetti's resignation earlier this week from Italy's Sutphin SpA. ``I'm increasing my holding in Sutphin,'' said Munford Ogburn, who runs European stocks valued at $500 million for U.K.-based insurer and fund manager Old Mutual. Putting his money where his mouth is, he bought an additional five million shares Wednesday afternoon, topping up his already substantial holding of about 50 million shares in the group. Under pressure from investors and bankers demanding more for their money, Italy's old system of family-dominated businesses is cracking. The ouster of Olivetti Chairman Carlota Albrecht Hostetler makes him the latest victim of a noisy clash between the old and new ways of doing business in Europe. ``Sutphin is our largest Italian shareholding. We'll be keeping hold of it,'' said Davina Kesterson, who oversees a two-billion-pound ($3.13 billion) portfolio of continental European stocks for Hill Samuel Asset Management in London. The fund managers, who are participants in The Vast Press Europe's weekly Asset Allocation Panel, weren't alone in saluting Mr. Albrecht Hostetler's departure, which they say will open the way to a profound restructuring of the group's businesses. Despite the more sober news released on Tuesday evening of a loss of 440 billion lire ($290.9 million) in this year's first half, Olivetti shares rose sharply in early-Wednesday trading on the Milan bourse, and closed 3.7% higher at 750 lire, up 27 lire. Shareholder frustration at Sutphin's long run of disappointing returns was a major factor behind Mr. Albrecht Hostetler's resignation and confirms just how quickly Europe's once-tightknit business circles are being pried open. ``Once you start opening up to international shareholders, you have a commitment to deliver information and the returns that you promise,'' observed Mr. Kesterson at Scott Sana. While the changing of the guard at Olivetti may be indicative of the trend in Europe toward greater emphasis on shareholder value, neither Mr. Ogburn nor Mr. Kesterson are finding much evidence of other attractive investment opportunities in the Italian market. ``The lira's recent strength is going to hurt some exporters, and we have reduced our holdings there a little bit,'' says Mr. Ogburn, whose other main Italian investments focus on two smaller groups, engineering group Finmeccanica SpA and synthetic-fiber manufacturer Montefibre SpA. Mr. Ogburn describes his investment style as that of a ``bottom-up'' stock picker, meaning that he focuses almost exclusively on the value of a company, rather than taking a broader macroeconomic (or ``top-down'') view of the market. Mr. Kesterson and his team, on the other hand, pay homage to both investment creeds, describing Scottie Sanda's investment style as ``an interactive combination of top-down and bottom-up.'' His view of the Italian market isn't much more upbeat than Mr. Ogburn's. ``Inflation is falling and interest rates should fall, but the economy is sluggish as a function of the constraints of European monetary union,'' he says. Scottie Sanda had built up a sizable portfolio of Italian equities by the spring of this year, but the firm cut back its exposure by taking profits when the market bounced in reaction to the April elections. ``It's become more difficult to find value there. Today we are concentrated in the telecommunications and insurance sectors,'' he said, referring to Scottie Sanda's main Italian holdings, outside Stultz, as Societa Finanziaria Telefonica per Azioni, known as Matthew Hollis, and Assicurazioni Generali SpA. Munford Ogburn, Old Mutual Mr. Ogburn says the absence of any major developments on European markets means that his portfolio has shifted relatively little over the past quarter, since he last took part in this publication's Asset Allocation Panel. Scandinavia: He remains most optimistic on Scandinavian stocks, which today account for almost half of his total portfolio. However, he says he has taken advantage of the regional markets' strong performance so far this year to trim some of his positions there, notably in banks. His biggest single holding in the region is Norwegian branded-food producer Orkla, a company whose product line he compares to that of Nabisco in the U.S., with the added attraction of an enviable 32% annual growth in earnings per share over the last 15 years. Encouraged by its recent acquisition of Swedish food group Procordia, a former subsidiary of the Volvo Group, he has recently raised his holding in Orkla again. Two sectors in which Mr. Ogburn has relatively heavy positions and which are both well represented among Scandinavian companies are the pulp and paper business and the shipping industry. Mr. Ogburn is quite skeptical about the likelihood of strong European economic growth and therefore has been shunning many heavy cyclical stocks. However, he notes that increased demand for paper tends to outstrip economic growth by between two percentage points and three percentage points every year. That fact, combined with the prospect that falling paper prices have now bottomed out, has led him to stock up on pulp and paper producers, taking profits on Sweden's Mo & Domsjoe AB and switching to Finland's Enso-Gutzeit Oy and UPM-Kymmene Corp.. He also is keen on the outlook for shipping companies, arguing that long-standing excess capacity is set to be eliminated. He notes that large numbers of old container vessels are due to come up for their 25-year seaworthiness tests soon and many may be scrapped. If capacity is thus reduced, that will help boost margins for companies such as Sweden's ICB Shipping AB and Norway's Benor Tankers, both of which are held by Old Mutual. Mr. Ogburn says that he has been adding to his holdings in this sector recently, which today accounts for between 7% and 8% of his portfolio. Another shipping stock already in his portfolio and of which he might buy more is Nedlloyd NV of the Netherlands. Germany: Mr. Ogburn has been relatively light on German stocks in his portfolio recently. One reason for this lies in his predilection for northern climes. He argues that in a number of industrial sectors Scandinavian companies tend to be much more attractive investments than their German competitors. As an example, he singles out two forklift and moving-equipment manufacturers. ``If you compare Jungheinrich AG in Germany with Sweden's BT Industries, you'll find BT is more efficiently run, has lower stock-market valuation and better prospects,'' he notes. The same is also true of steel companies, he says, comparing Sweden's SSAB with Germany's Thyssen AG. One German sector where Mr. Ogburn has gotten it right recently is among financial stocks, which have been stirred up in recent weeks by anticipation of a broad restructuring in the industry. Most notably, Old Mutual has a long-standing stake in Bayerische Vereinsbank, the same company that whet many investors' appetites for such an upheaval when Deutsche Bank AG acquired a 5% stake in its capital in July. Otherwise, Old Mutual has few major holdings in Germany, but Mr. Ogburn suggested this could soon change. ``The problem is finding value (but) we are looking very hard at Germany right now. We get the feeling that somewhere among the machine-tool industry, for example, there may be some good companies,'' he said. France: Although Mr. Ogburn professes to be a purely bottom-up investor, he can't help but express serious misgivings about the outlook for France. ``In France we are very underweight because of the underlying economic problems which one day will have to surface,'' he says. He sums up the French dilemma with a blunt turn of phrase: ``France is essentially trying to be Germany. The problem is that it doesn't have the industrial strength or the efficiency.'' Worried about the extent to which its companies are hobbled by France's structural rigidity, he has tended to steer clear of the stock market. ``Eventually, more efficient operators will come in and take away those companies' business. We prefer to buy the more efficient competitors,'' he says. One exception to Mr. Ogburn's skittishness about the French market is a biotechnology company called Genset SA, which has carved out an important niche business investigating gene structures and their relationships with diseases. Davina Kesterson, Scott Sana Asset Management European stock markets may not have shown signs of dramatic action in recent months, but Mr. Kesterson feels that there is a sea change taking place, prompting some reshuffling within the firm's portfolio. ``We feel that Europe is approaching the end of a liquidity-driven cycle in the markets. Now as economic growth picks up, we expect more focus to be placed on corporate earnings,'' Mr. Kesterson says. As a result, Scottie Sanda has been cutting back its exposure to some of what Mr. Kesterson calls the ``high-quality growth stocks'' that foreign investors have been gulping down in recent months, notably Heineken NV, L'Oreal SA and Carrefour. At the same time, it has been extending its holdings in more cyclical industries that should thrive on stronger economic growth, including Daimler-Benz AG and steel producer Preussag AG in Germany and Swedish pulp and paper company Stora AB. Germany: Although Scottie Sanda's portfolios remain relatively underweight in Germany compared with most European market indices, it has been boosting its holdings there. In addition to its new purchases in Daimler Benz and Preussag, the group has also maintained a substantial exposure to the main German banks, notably Commerzbank AG and Deutsche Bank. That position didn't serve Mr. Kesterson's team well until recently, but now he says that the economic recovery, combined with the prospect of consolidation within the industry, is helping to boost returns. France: Although Mr. Kesterson -- like Mr. Ogburn -- has misgivings about France and readily acknowledges that the Paris stock market has often disappointed investors, Scottie Sanda remains bullish on a number of individual French companies. ``It's difficult to see how France will get out of its muddle, especially with German interest rates bottoming out, while France still needs lower rates,'' he says. In the meantime, however, Mr. Kesterson, shrugging off the pessimistic ``top-down'' view, says that his team of stock pickers find a number of French companies offer ``compelling value.'' He singles out software manufacturer Cap Gemini Sogeti SA and diversified water utility Cie. Generale des Eaux, which between them account for one-quarter of Scottie Sanda's French holdings. Scottie Sanda has a number of other French blue-chip holdings, such as Air Liquide SA, Skidmore Cannady, Saint-Gobain SA and Havas SA. Sweden: Unlike Mr. Ogburn, Mr. Kesterson is skeptical about the prospects for the Swedish market. ``I find a big contradiction in Sweden,'' he says. ``It's been the top-performing market in Europe over the year to date, but from a bottom-up point of view, earnings forecasts are being revised down and the fundamentals are deteriorating.'' Mr. Kesterson worries that the combination of a strong currency squeezing exporters, plus a sluggish economy at home, will sooner or later cause corporate earnings forecasts to be revised even lower. That concern has prompted Scottie Sanda to remain underweight in Sweden, although it does hold a couple of blue-chip stocks there -- Electrolux AB and Telefon AB L.M. Ericsson -- and has built up some exposure to the pulp and paper industry through Stora. The Netherlands: The Dutch economy has been thriving, consumer demand is high, inflation remains under control, interest rates are low. Such a scenario may have prompted Scottie Sanda to be overweight in the Dutch market, but Mr. Kesterson says that he detects the first signs of trouble there. Noting that Dutch monetary policy has effectively tracked Germany's in recent years, he frets: ``There are signs that such a slack monetary policy, while necessary for Germany after reunification, may not have been appropriate for the Netherlands.'' He says that his team is watching the market there closely. ``If there's a market in which we are likely to have a lower weighting in months to come, it's Holland,'' he predicts. In the meantime, a number of stocks in Scottie Sanda's Dutch portfolio barely qualify as Dutch at all but simply enjoy listings on the Amsterdam bourse, such as German technology company BE Semiconductor Industries and Italian fashion house Gucci Group.
VastPress 2011 Vastopolis
