Executives of German companies we met during a conference in Frankfurt in January had a delicate balancing act to perform, between sharing with their audience their confidence in their companies’ turnover and profitability prospects and avoiding the creation of excessive expectations. They were clearly aware of the need to head off any disappointments, given the background of simultaneously high growth expectations and market valuations.
Equity investors face a similar balancing act this year. Objectively, global growth prospects are positive, and have the relatively rare feature of being so across all regions and economic sectors, although there is a slight doubt over investment levels in the USA. Meanwhile, consensus estimates of company earnings growth have seen regular upgrades, which are driving high market valuations.
In such circumstances, any deviation from forecasts either on the macroeconomic or microeconomic level could have significant effects on equity markets. This has already been seen with the faster than expected increase in US sovereign yields hitting markets in early February. In the other direction, good figures from Dassault Systèmes, with 2017 results and 2018 guidance both beating expectations and statements on progress in new business sectors providing encouragement for the long term, resulted in a 6.6% gain, despite the fact that the shares were already trading on a P/E of more than 30.
Our management process, with its double level of screening of the quality of the companies we invest in and their valuation levels, has already proved its worth in conditions such as these. The best companies tend to cause fewer disappointments, whilst the identification of discounts or premiums to intrinsic value gives our fund management committees a precious analytical tool at a time when valuations are stretched.
Meanwhile, January was a good month for the various compartments of the Rouvier SICAV, with Rouvier Valeurs gaining 3.1%, compared to 1.5% for the MSCI World Net Index in euro terms, whilst Rouvier Europe did particularly well with a gain of 3.9%, against 1.6% for MSCI Europe Net. Rouvier Patrimoine and Rouvier Évolution posted gains for the month of 0.5% and 2.4% respectively, in line with their targets.