Look past economic noise for offshore gems
Across developed economies, which have all shown continued signs of weakness of late, the United States has experienced relatively stronger growth while the stagnant eurozone appears plagued by political strife and uncertainty.
Brexit, the yellow vest movement and negative interest rates are just a few eurozone problems.
Against this background, global investors could be forgiven for overlooking the Old World; the S&P500 index increased 8.2 per cent in the 12 months to June 30, 2019, outperforming the Eurostoxx 50 index, which increased just 2.3 per cent, and the FTSE 100 index, which declined 2.8 per cent in local terms.
WAM Global’s portfolio has 55.0 per cent exposure to companies listed in the United States and 23.0 per cent exposure to those listed in Europe. However, the more important consideration than geographic location is the quality of the businesses and their growth opportunities.
Take Italy, for example. As the only European Union nation to enter a recession in recent years, Italy is crippled by debt and its government spending programs have isolated it from the rest of the eurozone.
At a national level, Italy is a basket case, but it is home to some companies with highly-recognised brands, including one of the most sophisticated and successful global alcohol producers, Campari Group.
A big beneficiary of the trend towards bitter drinks and away from sweet ones, Campari Group has achieved astounding growth since its inception in 1860. As well as its namesake red liqueur, Campari Group has a portfolio of more than 50 brands and operates across 190 countries.
The Aperol brand, made famous by the Aperol Spritz cocktail, contributes 16.0 per cent of group sales and has delivered a compound annual growth in volume of 19.6 per cent between 2003 and 2018. Campari Group has a market capitalisation of €9.9 billion ($15.8 billion) and we expect it will continue to deliver strong growth.
Italy is also home to the world’s largest hearing aid retailer, Amplifon, the global leader in the laboratory diagnostics market, DiaSorin, and international fashion label, Moncler.
Each of these companies have consistently created value for shareholders and have solid brands, global revenue streams, long growth pathways, and strong management teams.
These firms show that high-quality businesses can be headquartered or listed in countries with significant domestic problems and investors should focus on identifying companies that share these characteristics.
Two European companies that we believe are well positioned to excel include the German equivalent to Australia’s Ticketek, CTS Eventim, and UK-listed content producer Entertainment One.
CTS Eventim operates in the ticketing and live entertainment sector and is the leading player in Germany, Italy, Switzerland and Austria with significant market share in each market. The company has consistently delivered double-digit earnings growth over the past 15 years.
The company is conservatively managed with a net cash position on its balance sheet and the founder and its CEO, Klaus-Peter Schulenberg, owns 43.0 per cent of the shares on issue.
We believe the company will continue to deliver solid earnings growth ahead of the market’s expectations as consumers increasingly buy tickets online, which attracts a higher margin than physical sales, and as the business adds new verticals.
Entertainment One is a global independent entertainment group specialising in the acquisition, production and distribution of proprietary media content. ETO’s largest profit and value driver is the family programming division, which creates and distributes the Peppa Pig brand as well as PJ Masks and Ben & Holly’s Little Kingdom.
We believe content owners are increasingly valuable in a fragmenting media environment and ETO’s strategy is to provide its shows at relatively low or no cost, instead generating profitability through merchandise sales.
We see a large global opportunity for ETO’s portfolio of brands and content as it expands into new regions, like the US and China, and adds further content to its line-up. Given how large the opportunity still is, we see the company as well positioned against an uncertain global economic backdrop.
When investing in global equities, active investors should focus on company fundamentals and search for companies that can grow earnings despite political and economic conditions.
The volatility in share prices created by macro noise can provide attractive entry points, and in many cases, investors will be handsomely rewarded by exploring unloved markets.
Disclaimer: WAM Global holds investments in CTS Eventim and Entertainment One. Catriona Burns is the lead portfolio manager at Wilson Asset Management for the WAM Global fund.