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Equity Letter - The earnings after tax story


In the past EPS numbers had been boosted through share buybacks and a fall in the cost of debt. They should now be supported by lower corporate tax rates.

Our focus this month is on Global Concentrated: the First Three Years. We look back on the challenges faced by the Global Concentrated strategy over the past three years, and the lessons learnt.



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Equities everywhere are showing compelling returns over the past year. This amazing across the board surge can be perceived as a cause for stress or for satisfaction, depending on whether you consider this move to be sustainable or not.

If you are in the pessimists’ camp, summarised by the well-known motto “Sell in May and go away”, you must leave the party while the going is good. This option is definitely a temptation. Valuations are starting to be stretched and a number of markets are already posting double-digit returns year to date. In such a situation, who would blame you for taking profits after such an impressive run?

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Two major arguments nevertheless remain intact. Firstly, accumulating cash in a world where interest rates remain at zero or close to zero is always a difficult option, as equities continue to offer decent yields. Even Japanese equities, for the first time in memory for most of us, are delivering a yield in the region of 2%, while in the case of China or Europe yields are in excess of 3%. Secondly, we must ask what if there is any possibility of our equity world becoming safer more profitable. On the safety front, we must admit that with volatility at historically low levels we don’t believe that there really remains room for further downside. So yes, on the risk level markets are probably priced for the best. On the return front, with interest rates having reached a plateau, we are back in a “real” world where earnings are the driver of equity markets. Can earnings deliver further surprises down the road? This optimistic outcome is not out of reach. Indeed, not only has earnings momentum been in place for the last couple of months, it has never been so supportive for many years, admittedly thanks to some help from a favourable basis of comparison.

And as the icing on the cake, fiscal support is kicking in worldwide, lower tax rates being seemingly the ultimate solution for attracting money and talent. In the US, Donald Trump has once again reaffirmed his intention to repatriate billions if not trillions of dollars thanks to much lower corporate tax rates. The UK government is using tax breaks as its trump card to discourage corporates from leaving the country after Brexit, and even governments in continental Europe are one after the other announcing their intention of doing the same and embarking on a virtuous (or vicious, given the state of public finances?) cycle of corporate tax cuts. These initiatives are one more reason why we believe there is still room for higher net earnings per share, because the rule of the game is to think not only of earnings but also of net earnings per share after tax. In the past EPS numbers had been boosted through share buybacks (a practice which by the way still remains massively over used) and a fall in the cost of debt. They can also be inflated lower tax rates.

Thus we can meet a couple of conditions to justify higher stock prices, which also explains why we are more inclined to buy and hold, rather than to sell in May and go away.


Romain Boscher, Global Head of Equities





At the dawn of the New French Revolution?

Everyone reading the International Press definitely feels it. France moved overnight from being the source of the biggest potential danger for financial markets, the most threatened democratic place of the free world to a decent source of hope. The most ecstatic even mentioned the holy word “Renaissance”. The youngest current Head of State of the planet and the youngest “chef d’Etat” of France since Napoleon, Mr. Macron has as yet never run for any election in the past. We have indeed a pretty strong symbol.

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Making the audacious but not so bold assumption that Mr. Macron could win a majority or take control of a coalition at the lower house, (the momentum around his novelty could be powerful), it is worth looking into the details of his programme. This is not the most ambitious of the programmes we saw during this campaign but it has the merit to draw several lines: reduction of the number of civil servants, change in the labour law to offer visibility to corporates in case of lay-off programmes, reduction of numbers of MPs with a moralization of the political sphere. And equally importantly it advocates for a stronger Europe by being more integrated, more pro-business: a Eurozone budget approved by European MPs “to invest much more”, creation of a European Defence fund to finance military equipment, end of corporate-to-country fiscal deals like Apple-Ireland.

From an economic perspective these measures will with undoubtedly help the country and the euro zone to fill some gaps regarding structural reforms.

Regarding France one could even see in Mr. Macron the providential man who will cure one of the last “very” sick men of Europe. We note in particular the willingness to bring down the corporate tax rate to the European average of 25% vs 33.3% currently. It might represent a boost of up to 10% to French corporates’ after-tax profits. The most impacted stocks are to be found in the domestic sectors (financials, construction, media, house builders, telecom operators, IT Services), and more generally in the small and mid cap companies, which tend to pay a higher share of their tax in their domestic country than large caps.

The political backdrop being set what are we left with? A strong cycle with still very good economic surprises at the opposite of the US markets (cf charts), at a time where US based investors have only partly reallocated their positions in favour of Europe, a very strong quarterly season and EPS upgrades to come leading a consensus to expect 17% growth in profits for the current year, which we think is realistic. Yes the market is not cheap but we are not in a phase where we have an already massive bubble to deal with. We might be ready for a bubble to come but today we are at the point where everyone has to be selective when building a new position. We therefore take the view that the European market could continue to outperform other regional equity markets for a few more months

Laurent Ducoin

Head of Europe Stock Picking


Caroline Gauthier

Co-Head, Europe Small & Mid Caps


Inflows into Euro zone equities could surprise on the upside

After the first round of the French presidential elections on April 23, volumes traded on the CAC 40 and in euro zone equities soared spectacularly. Then, following the second round on May 7, the movement calmed down, with investors taking profits after the surge of the two previous weeks. What will be the main trends over the next few months? All other things being equal, if the improvement in Euro zone fundamentals and the easing in political risks are confirmed, the rebound in volumes could go much further than what we observed over the last few weeks.

On 24 April, the day after the first round, volumes traded on the CAC 40 surged to 8.8 billion euros (compared to an average of 3.3 billion since January 2016) while the index jumped more than 4%. La elimination of the worst case scenario of a second round run-off between two Eurosceptic candidates buoyed the entire Euro zone and more particularly banks, the sector most vulnerable to the Frexit threat.

Since then daily volumes traded on the CAC 40 have subsided, to 4.4 billion on average between 25 April and 5 May, and then to 4 billion post the second round (from 8 to 10 May). This fall however could be simply transitory and could give way to an unexpectedly strong rebound in inflows into Euro Zone equities. Such a scenario is based on two observations:

Firstly, the recent pickup in volumes has remained modest. According to EPFR, outflows from European equities were close to 80 billion between January and October 2016. Even though European equities returned to favour post Trump’s election on November 4, only roughly less than 50% of flows have returned to this market. Secondly, this rebound in inflows has benefited almost exclusively ETFs. In other words, provided that the environment remains supportive, Euro zone equities, and especially actively managed equities, could benefit from a strong catch-up effect.


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Ibra Wane

Senior Equity Strategist



Global Concentrated: The First Three Years

Challenge 1: Create a process!

In April 2014 the Global Equity team in London launched the Global Concentrated strategy. Our challenge was to pre-empt some changes already evident in the funds marketplace. It was already evident that the time of the high fee closet indexer was over. ETFs were an existential threat to active management if we were unable to meet clients demands for higher and more sustainable alpha, differentiation from passive and of course competitive fees.

We decided to clearly differentiate the strategy: 1) 30 stocks globally, “best ideas” only 2) no sector / region constraints 3) contrarian value tilt 4) simple but disciplined process blending quantitative screening and traditional research 5)risk management focused on maintaining 4-5% tracking error but diversifying away as much factor risk as possible..

A point I would like to highlight is the very steady Active Share and also the consistently high specific risk in the portfolio. Although weights have varied substantially regionally and by sector these metrics have been quite stable suggesting we have constructed the strategy carefully extracting an appropriate level of diversification from the thirty stocks but maintaining a very healthy distance from the benchmark. This strategy remains the “anti tracker” but risk is carefully controlled.


Challenge 2: Can we be truly “dynamic”, fox, hedgehog or both?

The philosopher Isaiah Berlin wrote an essay in 1953 “The Hedgehog and the Fox”, where he divided the world of writers and thinkers into two: the hedgehogs who were driven by a single defining idea and foxes who synthesise many experiences in their method and outlook. A good strategy needs to embody both of these attributes. On the one hand clients require that a strategy follows its stated philosophy and process clearly and consistently. In our case this is a relentless exploitation of price/value anomalies which we believe occur in the market. On the other hand this should not be achieved in a static way. the successful manager who simply rides a market wave and where there has been little breadth in terms of application of that philosophy and process is not in our view the optimal one A truly global strategy should show an ability to hunt alpha in many places and to dynamically shift – in a risk appropriate manner – to those areas of the market where the opportunities are greatest.

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I believe we have shown ourselves very able to do this. In 2014/15 there was a value anomaly in Japan, particularly in cyclicals, which we were able exploit, in mid-2015 and into 2016 this shifted to Europe and has largely remained there. We have been stubbornly overweight Europe for some quarters now and this is beginning to pay off. Today the strategy has something of a barbell structure reflecting ongoing opportunities in some cyclical areas, particularly European financials but also emerging attractiveness of high FCF yield stocks (healthcare, tobacco). Value for us is defined as a 25% discount to intrinsic value measured on a DCF basis: sometimes this aligns with a traditional definition of value (low P/B), sometimes it does not.

Challenge 3: Avoid the blow ups!

We have learned – the hard way – that it is critical to avoid blow ups in a concentrated strategy. Two stocks have cost us nearly 400bps of performance combined, Porsche (Germany) and CBD (Brazil). In both cases the analytical work completed prior to investment was innovative and extensive but in both cases the outcome for the strategy was highly adverse. In both cases there was a clear risk factor that was understated in our process: governance and more broadly ESG. Our response has been to consider these factors much more carefully in stock evaluations. The one major revision to our process that we have done over the three years has been to integrate ESG ratings into our stock selection. Our strategy scores a C- on average on Amundi’s ESG scoring which makes it better than the overall benchmark on these factors.

Conclusion and Lessons

Overall I am pleased with our first three years. We have had plenty of challenges but this has made the team more cohesive. We have also used these challenges to refine our investment processes and our tools. The portfolio characteristics have been quite consistently close to our initial targets and performance, whilst not the 3% annualised excess return we have targeted, is competitive against a struggling active management industry. The key lessons we have learned:
1. A small centralised team works effectively when combined with disciplined screening;
2. Diversification and risk control can be achieved with 30 stocks;
3. Price targets drive turnover but holding periods are average 18 months in most sectors;
4. Blow ups are painful and time consuming: they must be avoided!
5. The best things in life are often not the most expensive (this is after all our strategy philosophy)!


Nicholas Melhuish

Head of Global Equities, Amundi London

BOSCHER Romain , Co-Head of Equities
MELHUISH Nicholas , Chief Investment Officer, Equities – Amundi London
LEMONNIER Patrice , Head of Emerging Markets Equities
IWANAGA Yasunori , CFA, CIO Amundi Japan
DRABOWICZ Alexandre , Deputy Head of Equity
ANDRE Sudeshna , Investment Specialist, Equity Strategies

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