Go, Go, Go - UK Stocks Playing Big In Europe
Chris Bailey | Nov 21, 2019 10:55
One of the more interesting statistics released this week was the $3 billion equivalent inflow into pan-European equities over the last 2 weeks. Putting an end to a record run of 85 weeks of persistent outflows.
The above statistic on European equities was the second piece of good news in terms of flows and improving investor perceptions in the last week. The first was the dramatic march up of the eurozone in the overweight/underweight rankings by global fund managers in the latest regular monthly allocation survey of their holdings.
Whilst the UK also moved modestly up the rankings, you could be forgiven for missing the eurozone’s new ranking juxtaposed between the emerging markets and the technology space.
This indicates some clear progress given these two investment areas have been much loved in recent times. Thanks must be given to the September policy loosening by the European Central Bank and global geopolitical events such as the slow improvement in the tone of world trade discussions, which have been largely in the eurozone’s favour. Even the third quarter earnings season has been broadly workable, helping to push the STOXX 600 index up over 20% from its 2019 lows.
That said, much work still needs to be undertaken on the Continent: you do not have Germany flirting with recession or multiple inconclusive Spanish elections in a handful of years in a flawless backdrop. But it should get you thinking about UK listed stocks with significant exposure to the eurozone as next stage plays on such improved perceptions...even before you try to figure out what the repercussions of the General Election may be in four weeks time.
One large cap UK share that stands out is packaging company DS Smith (LON:SMDS), often overlooked by investors due to its dull sounding name. However, the company is a leading producer of the recycled corrugated board that many of our e-commerce purchases come parcelled in. It is also at the forefront of flexible packaging solutions for fast moving consumer goods (FMCG) companies desperate to try and differentiate themselves.
These are two clear growth trends and - to capitalise more fully - the company has expanded in recent years into countries such as Spain and Romania (plus the United States) to facilitate offering these solutions to the typically very global FMCG community.
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European revenues currently best those generated in the UK, a gap that looks set to expand further. A sensibly covered 4.2% dividend yield helps seal the opportunity, along with a share price that is starting to recover from the doldrums of earlier in the year.
The second name is the retailer Kingfisher (LON:KGF), best known for its DIY brand B&Q in the UK, albeit it is the growth of the company's other domestic brand - Screwfix - that has dominated in recent years. This alone has excited some investors who perceive an opportunity to split the company up, but I would also highlight the size and influence of the company's French business headed by the Castorama brand (both the current and previous chief executive officers of the company also happen to be French). Current trading remains weak in France but this means sentiment levels are very low and the base for future comparisons very easy.
It will surprise few to hear that the outlook for the group's businesses are ultimately correlated with confidence levels in the economy (and particularly in areas such as the property and construction markets) but the market cycle always moves before the economic one. A 5.2% dividend yield also helps out.
And the third has to be Whitbread (LON:WTB), which I wrote about a couple of weeks ago. Since this article was published, the shares have perked up a little aided by some positive brokerage comments around the potential of Premier Inn's continuing expansion into Germany, among other corporate initiatives. Whilst it is pleasing to see the stock market acknowledging such potential, I continue to perceive there is more to come.
Whilst it is always fascinating to watch for regime shifts in the investment world, there is a reason why one of the most quoted financial market observations is the Benjamin Graham dictum that ‘in the short run, the market is a voting machine but in the long run, it is a weighing machine’, which fits nicely into the reality most practical investors see. Fear, greed and related perception issues dominate shorter-term and - over a longer period - realities concerning profit, cash flow and general thematic value matter much more.
So yes, the eurozone influence on UK stock market names can be more than just a narrow discussion about Brexit!
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