Global equity markets ended 2018 with their worst December performance since 1931. Contrary to the hopes expressed in our November report, sentiment turned out to be worse than actual investor positioning. There was ample selling waiting in the wings to meet the small uptick at the end of November. A Federal Reserve on autopilot with regard to balance sheet reduction still – and in our view unexpectedly – surprised markets negatively and they briefly dipped into bear territory with -20% from peak triggered on intra-day levels. The traditional year-end rally was very limited and late, but at least put some lipstick on the pig.
The front end of the US Treasury curve inverted for first time since 2007. Leveraged loan and junk bond markets froze. Regional US business surveys from Richmond and Dallas collapsed. China purchasing managers' indices (PMI) fell into contraction, and China retail sales growth marked a new 15-year low. Korean exports – usually a reliable lead indicator for global earnings per share (EPS) – turned negative. The eurozone PMI made a 4-year low while oil and copper prices plunged.
The fund fell by 11.7% in the quarter compared with a fall of 10.9% in the benchmark index, bringing the 2018 return to -9.8% versus an index return of -9.5%.
There were no significant contributors at a stock level over the quarter. Auto component sector holding Autoliv lagged and we continued to reduce our position size in this and Nokian Renkaat, taking the opportunity to sell on strength. In the materials sector our holdings in Smurfit Kappa and UPM were adversely affected by falling testliner prices and inventory build-up in pulp and packaging.
|Discrete year performance
||Janus Henderson European
Selected Opportunities Fund (%)
|FTSE World Europe
(ex UK) Index (%)
|1 year to 31/12/2018
|1 year to 31/12/2017
|1 year to 31/12/2016
|1 year to 31/12/2015
|1 year to 31/12/2014
* Source: Morningstar, at 31 December 2018, nav-nav, net income reinvested, net of fees, Class I Acc shares, in Sterling. Past performance is not a guide to future performance. Prices can go up and down and you may not get back the amount originally invested. NAV = net asset value.
Fund activity review
Key activity over the quarter included the introduction of German automotive, defence and electronics group Rheinmetall, where we identify strong prospects for the defence division as well as an undervalued auto components business. We added Grifols, a leading manufacturer of blood plasma-derived therapies as the underlying demand environment (volumes and pricing) remains very strong. Market volatility provided the opportunity to take advantage of an irrational share price move to establish a position in Finnish engineer Wartsila and we also started a position in global IT services provider Cap Gemini to gain exposure to the structural ‘digitisation’ trend in a platform neutral way, across multiple geographies and sectors. As the number one partner on S/4 HANA implementation projects it is complementary to our SAP position. Finally, we participated in the initial public offerings (IPOs) of Knorr Bremse, a global leader in braking systems for rail and commercial vehicles, and Tetra Pak peer, Swiss Combibloc.
On the sell side we exited Ryanair due to poor profits guidance and disposed of Kinnevik following its profit warning. We sold Deutsche Post as ongoing negotiations with the German regulator over potential stamp price rises may impact in the short term. Other disposals included Fresenius and banking stocks Intesa Sanpaolo and Unicredit. We reduced our position in enterprise software vendor SAP following its pricey acquisition of Qualtrics.
Our outlook remains one of caution. Central banks have started withdrawing liquidity, macroeconomic indicators are pointing decidedly south, and the US-China trade war faces an uncertain outcome that we continue to think is unlikely to restore the old benign trading conditions. In addition, elevated corporate debt levels with the largest refinancing needs in a decade on widening credit spreads provide a final unsettling ingredient in this dangerous mix.
As a consequence, we believe elevated volatility for stocks is here to stay and market rebounds remain for selling. Yes, some sort of mild recession may be priced into European industrial stocks already, but this does not imply that stocks have yet troughed. Many stock prices in Europe are down 20-30% from their peak, but in bear markets it is quite common to see the trough only when a third of stocks trade at 50% below their peak. At the moment this only applies to approximately 9% of stocks on both sides of the Atlantic. If we are right that the lows for the US equity market are far from in, the major buying opportunity in Europe is still ahead of us.
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