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Monday, 16 December 2013

Ernst’s Economy at BNR Newsroom: The “stock exchanges in 2014” edition! Pt II: genuine investors speak upon the Dutch and international stock markets.

This is the second part of my summary of BNR Newsroom, "the stock exchanges" edition. BNR Newsroom is the semi-live talk-radio show of BNR News Radio, hosted by the distinguished Paul van Liempt.

The guests during this part of the show were:
  • Corné van Zeijl of the SNS Dutch Stock fund;
  • Willem Burgers, manager of investment fund Add Value Fund;
  • Marco Groot, independent investor and columnist of Het Financieele Dagblad. 

The official microphone of BNR Newsroom
Picture copyright of : Ernst Labruyère
Click to enlarge
Just like in the first part upon this radio-show, I will not print the questions of Paul van Liempt, myself or the other people in the audience. Not because these were not good questions; I just want you to show the opinions of the investment experts as a whole.

It happened that the same subject was covered by more experts. This is because a talk-radio show is always a dialogue between people; something that, however, is not reflected in this summary.

The opinion of Corné van Zeijl

“People with shares made a lot of money in 2013. In the US, 2013 has arguably been the best period for stock since the Second World War. This was about as good a period as ever for stepping into stock investment.

The lion share of the increased stock rates has been caused by a higher valuation for stock. This comes and goes. The valuation has become significantly higher during this period; consequently, the companies should have additional earnings growth in the next period. Things look promising as far as that concerns, but if this will be enough is the million dollar question.

Corné van Zeijl, fund manager of the  SNS Dutch Stock Fund
Picture copyright of : Ernst Labruyère
Click to enlarge
My target for the AEX Amsterdam index is 430 and that target is mainly based upon the expected earnings growth. Important indicators, like the purchase managers index (PMI), seem to point at a decent earnings growth. This could justify the current valuation and help the stock to maintain the current, relatively high level.

In spite of the current (relative) buyers’ strike in Europe, the earnings growth will come from a number of determinating factors:
  • The economic recovery coming into bloom. When the economies enter such a recovery phase, earning growth is always at the highest level
  • Many European companies make their money outside Europe, as it comes from the United States and the emerging markets. 

And about Dutch politics? Let me say that every country gets the politicians it deserves. 

Politics in The Netherlands is a very diverse mixture of (small) parties with opposite interests; this often leads to soft solutions for problems, instead of the decisive interventions that the country needs, as far as I'm concerned. 
However, we chose for this diverse political system ourselves.

We have been talking about the member certificates of the Rabobank [this cooperative banks does not have shares, but it decided shortly to bring its member certificates to the stock exchanges, as a tradeable bond – EL ].
These could be a very good investment tool for private (amateur) investors, when the price is right and the revenues are favourable. I expect this to be a success.

Historically: if you want to make a real profit on the stock markets, then you have to step in ‘when the blood flows through the streets’, as the English and American investors so impressively state. When the stock exchanges are on the frontpages of the newspaper, you have to do exactly the opposite of what the majority of people does.

When you would have done so in August 2011, you would have had brilliant revenues these days: at that time the AEX Amsterdam Index was well below 300 points, while it is now close to 400 points.

Chart of the AEX Amsterdam Index  between 2011 and 2013
Picture courtesy of:
Click to enlarge
However, when the AEX index goes through the 400 point boundary, it will be happy-happy time for everybody. That is traditionally the time that you have to look out, as there is then too much optimism in the markets.

To throw in another old proverb upon the stock exchange: “you have to buy stocks from people with white faces and have to sell them to people with red faces”. In other words: buy low and sell high.

During an considerable crash, like it happened in August 2011 – right before the first euro-crisis – you really should buy stocks. That is scary, however, as there is always a good reason for such crashes; in this case the emerging euro-crisis.

Nevertheless, when there is ubiquitous pessimism (i.e. the stock exchanges are on the frontpages in a negative context), it is a wonderful time to step in. 

With the AEX, we can definitely go above 400 points in the coming months. The end target for 2014 for the SNS Dutch Stock fund is 430 points. I do think that we will reach that target in the coming months.

The debt problem of Europe, the US and Japan won’t have a key influence on the stock rates. The US debt problem is comparable with the European debt problem. That is not so bad.

I am, however, more pessimistic about the effects of the intended tapering, as a phenomena; as a matter of fact I am much more pessimistic than Luc Aben (see the first part of this article series). I’m afraid that tapering will again lead to a wave of fear at the exchanges. During this year, it caused a sturdy turnaround.

Macroeconomics, as well as tapering, are both important: the company earnings have to increase to justify the expectation, priced in the stock rates, but tapering could spoil the party. 

So many billions have been invested in the financial markets in recent years, that people could become scared when these monthly amounts will be withdrawn from the financial markets - [“the market has to go to rehab to not be addicted to these financial drugs anymore” - EL].

When you assume that there is a lot of future profit ‘baked in’ the current stock rates, then a disappointing economic growth could indeed cause disappointment among investors. 

On the other hand, in for instance the US, you see that the economic indicators – like the PMI, the rising consumer confidence and the decreasing unemployment – are more at the upside of the economic growth spectrum than at the downside of it. There are a lot of greenshoots in the market.

I have a few stocks in my crosshairs:

The first is Arcelor Mittal (international steel mills), due to the emerging economic recovery. Arcelor just opened a steel mill in Brazil, because of the increasing demand from the US.

The second good stock is Boskalis (a company specialized in dredging): this stock has a moderate valuation, a healthy policy and a clear management guidance. On top of that, it seems that a few important projects in Singapore are now at the brink of coming loose. Boskalis already received a few orders from Singapore.

The third stock is SBM (offshoring in the oil and gas industry). 

This company had solved a lot of problems lately and it has now only two left:
  • A problematic project called Deep Panuke, which will be solved soon, I hope;
  • A bribery scandal, which could cost them a helluva lot of money, but we don’t know this yet.

When these problems are out of the way, the stock rate can find its way to normal, higher valuations again.

The opinion of Willem Burgers

The trade in member certificates Rabobank is an interesting alternative for cash, due to the good revenues. I am curious whether this example will be followed by other banks or institutions. 

I don’t exclude the possibility that other banks will try this too, when this initiative is succesful at the stock exchanges (i.e. sufficient trade in it). For private investors, it could be a good addition to their investment portfolio.

Willem Burgers, fund manager of Add Value Fund
Picture copyright of : Ernst Labruyère
Click to enlarge
Historically, the media have a strong influence upon the stock rates. People there look at the short term, when the AEX will go through the 400 point boundary. I am convinced that this will happen quickly: at the end of this year or early next year.

My top 3 for 2014 is first: Hunter Douglas

This company should be able to double its stocks rate in the next two or three years (making it equal to the highest rate in 2007). 

The profitability of the company will accelerate in 2013Q4, as the company had to take a reorganization burden in 2012Q4. In 2014, the company can profit from the good consumer confidence in the US and the improving consumer confidence in Europe.

This company has an intrisical value that will be soon translated into the stock rate, in spite of the fact that this company is seldomly in the crosshairs of analysts. The fact that the Dutch housing market does not recover very strongly, does not matter so much: the Dutch market is not so important for HD.

My second favorit is Nedap. 

This company has disappointed this year, but that is exactly what makes it attractive: the stock rate is currently under pressure. I expect a combined growth of 15% - 20% in the coming years. This is what we usually saw in the previous years. 

This range has been interupted in 2013, as the company made huge investments of which the pay off will come later: new technology and new buildings, in order to improve production capacity. These expenses have put the profits under pressure in 2013, but for next year the profits could indeed rise to 15% - 20%. On top of that, the company has a pay out of 75% of profit, bringing the dividend revenues to about 5%.

Third: Royal Imtech

The loser of 2013. They are working very hard on the recovery of the company. This recovery will become more visible in the first quarters of 2014 and consequently bring back confidence. What we saw at Ahold ten years ago, will now happen at Royal Imtech, in my opinion.

And about the general profit to earnings ratios (P/E) in 2014: on average, many analysts have been too cautious, with their forecasts upon the recovery of companies' profitability; at least at the small and midcap funds. I expect some positive readjustments here. The alternatives for investing in stock are still very hard to find.

However, you have to look in which stocks you want to invest. In the AEX index, there are only five stocks that determine 50% of the index: Royal Dutch/Shell, Unilever, Philips, ING and ASML. 

When you look at these stocks, then the earnings forecasts don’t look bad at all. This could lead to a higher valuation than a.o. the SNS Dutch Stock Fund of Corné expects.

The opinion of Marco Groot

My bucket of potentially succesful stocks contains: Nutreco (cattle and fish food for breeders) and Ahold, with Royal Dutch/Shell as a hedge.

Recently, Nutreco got a small dent (i.e. lower rate). The company didn’t do a great job in 2013, when compared to their peers in the market. On the other hand, this company can be pivotal in solving the problem of the global food scarcity during the coming decades. There is a lot of marginal revenue in this industry, so when Nutreco can reach its targets for the coming years, the stock value could soar. There is a lot of room for growth in the rate.

Marco Groot, independent investor and FD columnist
Picture copyright of : Ernst Labruyère
Click to enlarge
I personally stay away from very volatile stocks, like those from the metal industry. 

To make an example: Australia – a giant exporter of metals – lowered the interest rate to 2.5% in 2013 from 6.5% in 2011, which is very accommodative to f.i. China’s inflation rate. This is a clear sign that more is going on there than meets the eye. These movements are very hard to predict.

Therefore I rather stay with companies that can better manage their own business.

And concerning to the latest hype, the Bitcoin, I have this beautiful wisdom of the exchanges: avoid fear, hope and greed. All these ingredients are very much present in the bitcoin.


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