Cazenova Capital Management is a UK investment business with close to $20 billion under management. Its hedge fund, European Equity Absolute Return Fund has some interesting equity ideas in a recent letter.
The fund finished flat after May, a month in which Greek elections, along with a Spanish banking crisis precipitated a fall in a wide range of European assets. The fund’s long value fell by 4.3% while shorts in the fund were up 4.4%.
The slight loss is due to exposure to oil companies, including SBM Offshore N.V. (AMS:SBMO) and Repsol SA (PINK:REPYY). and from some smaller Swiss companies, including Oerlikon and Rieter. The fund has been shorting European stocks involved in mining, telecoms, and some auto companies.
The German Auto industry is a short through June for Cazenova. It is believed that those stocks will be some of the last to face significant losses from the European crisis that is currently proceeding. There is also an opportunity in shorting the DAX, an index of blue chip German stocks, according to the letter.
One of the biggest problems in European assets is a byproduct of the crisis mentality. Assets that are considered safe, like bonds from Switzerland and Germany, have investors flocking to them. That has led to an overvaluation in those assets.
The report suggests that the safety of those assets has been completely compromised by their perceived safety. The gross redemption value of the bonds mentioned has turned negative because they hold the safety investors are looking for, and investors will pay premiums for that safety.
The same pattern has held in equity prices. According to the report Unilever plc (LON:ULVR) has risen by 10%% this year but the expectations on earnings has fallen. That means the higher price is justified by its safety rather than its fundamentals.
Likewise, Essilor International S.A. (EPI:EA) has risen by 31% in the last twelve months while its earnings forecast has remained almost entirely unchanged. The purchase of equities based on their perceived safety rather than fundamentals is a dangerous trend in European equities.
The letter also points to changes in the underlying dynamics of the market. The report sees tight correlation in the values of world wide currencies with the performance of growth in Europe. That, along with the high valuations of so called safe equities, leaves a dangerous mix swaying the markets.
The managers are expecting a confused June ahead. The possibility of a Greek exit raises some interesting questions. The fund has reduced exposure heading into June.
There’s changes coming in Europe and the report recognizes that. There’s no predictions given here, and no moves being made on long term predictions. But there is some hope in Europe, and as always there’s value to be found.
