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Generali sees opportunities for Southern European equities

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Generali Investments believes that Southern European companies are showing low valuations and have upside potential and that its GIS European Equity Recovery fund is positioned to take advantage of the region’s re-rating.

“We believe Southern Europe has a significant recovery potential,” says François Gobron, fund manager of GIS European Equity Recovery. “Clear signs point in that direction, including the economic growth in Spain and a rapidly rising employment in Italy. Furthermore, as companies in Southern Europe still trade at lower earnings multiples than their European peers, we believe their potential to outperform is meaningful. By leveraging our proven stock-picking skills, the fund will benefit from the re-rating of Southern European markets as soon as confidence in the macroeconomic environment is fully restored.” 

The GIS European Equity Recovery fund invests mainly in equity securities issued by companies listed on Southern European markets. Spain, Italy, Portugal and Greece represent 99 per cent of the total equity invested1. The fund favours companies with strong operational leverage2 and large restructuring potential. The fund adopts a pure stock-picking investment process and selects companies based on the quality of their strategy and management. The shortlisted companies are valued through a Discounted Cash-Flow model combined with a recently introduced, proprietary and innovative Monte-Carlo model designed for highly uncertain environments. The fund invests in companies offering at least a 50 per cent upside potential in terms of total return on a three to five year time horizon, leading to a low annual turnover ratio of 25 per cent. 

“Companies in Southern Europe still show higher upside potential relative to their European peers as the local financial markets have not fully recovered yet from the 2008 and 2011 crises and valuations remain lower on a relative basis,” adds Gobron. For instance, the 11x median of the 2017 price-to-earnings ratio estimates of the fund’s portfolio compares with 15x for the Eurostoxx. The 1.0x median of the 2017 price-to-book value ratio estimates of the fund’s portfolio compares with 1.7x for the Eurostoxx. “We are therefore strongly convinced that the companies we decide to invest in after our careful strategic analysis have the potential to outperform peers on an operational basis going forward.” 

The fund outperformed all its underlying local benchmarks since inception. The Italy-based holdings of the fund, for instance, recorded a combined growth of 19.2 per cent versus the 7.5 per cent rise of the local benchmark (FTSE MIB30). For Spain, the relevant holdings registered a +20.3 per cent performance versus +5.3 per cent of IBEX354. 

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