Chahine Capital’s macroeconomic analysis shows that European equities and value are now the most attractive in this cycle. The European risk premium is particularly high. Italian equities have strong rationing potential.
This emerged from an interview with Julien Bernier (chief investment officer) (photo) of Chahine Capital. Among other things, the Luxembourg-based manager will use macroeconomic analysis to define four distinctive pillars, namely economic momentum, monetary policy, valuation and a behavioural component.
Chahine Capital was launched in 1998 and is a pioneer in quantitative equity management. It is an independent asset manager based in Luxembourg, Paris and Frankfurt with EUR 1.8 billion under management with 18 employees.
Since the beginning of this year, Value has been catching up strongly.
“Economic momentum in Europe is still on the rise, and thanks to favourable base effects we are in the middle of the cycle. The European market is in an uptrend and is still trading above its 12-month moving average. This continues to argue for an overweight position in equities because, with GDP growth of 4.7% this year, Europe is doing well. The correlation between economic momentum and our management alpha is also very strong,” Bernier said.
Inflation
Bernier pointed to the high inflation that is currently gripping Europe. Globalisation, sustainable production standards and higher production costs are structural elements, he said. “Raw material and energy prices are rising sharply and households have saved money that they are now spending. In the US, many jobs remain unfilled, which means wages could rise. Overall, central banks will continue to ease.”
Europe on top
Chahine Capital argued that European equities remain particularly interesting with the risk premium currently at 6.4 per cent compared to the average of 5 per cent. “That offers a rerating potential of 14 per cent. Profits will be 18 per cent above pre-Covid levels in Europe by 2022. Value is cheap while Growth and Visibility (companies with predictable earnings growth) are close to their historical averages. Value has a 12 per cent risk premium and can therefore still rise sharply.”
According to the CIO, secular growth also remains an attractive niche. Defensive companies, on the other hand, are less interesting. Italy also gets a special mention, because “after a double bottom, the Italian index now has upside potential of 40 per cent over time.”
Digital Stars
Chahine Capital’s flagship fund is the Digital Stars Europe fund, which has existed since 1998 and is also distributed in Belgium. It currently holds €907 million in invested assets. “It is a 100 per cent equity strategy that does not do market timing, but does follow a momentum strategy.”
According to Bernier, the idea is to start identifying star stocks that perform superiorly. It is an active long-only strategy that bets on companies of any market capitalisation that can significantly outperform the benchmark. “Profit-taking is also planned in the event of an overheating trend. The focus is on portfolio diversification and liquidity.”
Currently, the portfolio is heavily exposed to technology and the cyclical stocks that can benefit from the economic recovery. So the tilt is rather industrial at the moment. “In contrast, we have few positions in food & beverage and utilities. To a lesser extent, we are also underweight in energy companies. In healthcare, we recently increased our positions and became neutral.”
Track record
Digital Stars Europe capitalisation, institutional share class:
- Cumulative since inception: +807.7 per cent versus +201.3 per cent for MSCI Europe Net Return
- Annualised since inception in 1998: +10.1 per cent versus +4.9 per cent for the benchmark.