During the past three years there has been a strong focus on short-term free cash flow generation an...
During the past three years there has been a strong focus on short-term free cash flow generation and dividend yields. This has led to a situation where companies with strong structural growth prospects are very attractively valued.
High corporate cash levels, combined with strong balance sheets and high returns on equity, will lead to a refocusing on growth in the equity markets.
This is a development that is partly fuelled by the recent strong pick-up in M&A activity. Our analysis shows that companies that are innovative and invest for future competitive edge are significantly undervalued, and we believe this will lead to a renewed polarisation of stock market valuations.
We have significant investments in companies that we believe are going to be the global winners by being in favourable positions through strong brand momentum combined with global sourcing capabilities.
One example is Adidas, which in terms of branding, is well-positioned in both developed and emerging markets, and at the same time is benefiting from global labour arbitrage through its global manufacturing network.
Another focus area is the digitalisation of the media value chain, which after a lot of hype during the IT bubble, is now actually in the process of materialising. Only now, however, the market is much more sceptical, despite the tangible evidence that is building.
We believe that media content owners will enter a very favourable development, as digital distribution picks up momentum. Just take a look at the recent success Apple has had with its iPod digital music player.
Companies like EMI that have suffered severely from piracy over the past many years will now see new distribution platforms emerge. Here, flexible pricing and high consumer convenience will drive both pricing and volume levels which are proving much more attractive than presently discounted into the stock price.
Investors generally underestimate the power of technology transitions, and particularly in the current market sentiment. We believe that the coming decade will bring some surprisingly strong transitions that will significantly exceed expectations in terms of volume. One good example is the developing trend in flat-panel displays, where we believe there will be a development in the coming decade to match the PC explosion of the 1990s. The fact that flat-panel products to a large degree are under the influence of Moors -Law will lead to rapidly falling prices. And, as we estimate the price elasticity to be very significant, there will be surprisingly strong volume expansion.
While margins for the manufacturers of flat panels may come under a lot of pressure, just as we experienced in the PC industry, we are convinced that the capacity build-out will be much stronger than what is currently discounted into the prices of semiconductor equipment companies.
Utilities and small caps
In contrast, we are negative on utilities and utility-like companies, as we believe the risk/reward level is unattractive. Investors have been buying these companies as proxies for bonds, and we see very little upside from current levels.
Also, we increasingly see difficulties in finding attractive opportunities in the small-cap segment, where significant stock price performance has almost eliminated the liquidity premium that should be present within the segment.
Alternatives to alternatives?
Our weekly heads-up for advisers
Patience must be a watchword
'Misleading, unclear, unfair' promotions
Will extend to wider models