JPMAM’s auto focus proves boost for managers

Managers John Baker, Jon Ingram and Blake Crawford upped their exposure to economically sensitive companies ahead of the central banker’s announcement he would pump €60bn (£44bn) into the economy on a monthly basis through the purchase of government bonds.

A key sector targeted by the managers was the auto sector, which has been identified as an undervalued area of the market by the team.

“You would assume lots of people have moved to be more cyclical in terms of their exposure, and we were no different,” Mr Crawford said.

But the manager said the auto sector was an area that remained cheap compared to the wider market. Favoured play Daimler, makers of Mercedes-Benz cars, has seen its shares trading at 11x its expected 2016 earnings, compared with 17x for the broader index.

“Auto sales in Europe are close to a 25-year low,” Mr Crawford said.

“The average age of cars is also at the highest it has been and customers are looking at how much it costs to run their existing car against the cost of buying a new one. With interest rates at the level they are, we are now seeing a tipping point for demand.”

While Mr Crawford said he expected the market to rise after Mr Draghi’s announcement, he claimed he “would not have forecast the move being as strong as it has been”.

Elsewhere, the manager said he had also been targeting food producers that have large parts of their operations overseas.

Mr Crawford said Delhaize, the Belgium-based food retailer, and Dutch retailer Ahold, both benefited from having their costs in euros and part of their profits in the dollar.

“Delhaize has convenience stores in the US, and in their recent Q4 results showed strong like-for-like growth in the US-part of the business, which makes up roughly 90 per cent of profits,” the manager said.

“I don’t think the market has quite captured this because it is still trading at a discount to many other supermarket names.”

Mr Crawford said he had also been focusing on companies that would benefit from the strong falls in the oil price, citing airline Ryanair and the aviation sector generally.

“With the oil price falling significantly throughout last year, and with it now near the high $50s per barrel level, it is a sector we think is fantastic in terms of earnings momentum.”

The manager said he started moving into industries that would be positively affected by the lower oil price at the back end of last year.

In terms of oil stocks themselves, he said many still seemed expensive in his view, citing the fact Italian business ENI was trading on 31x earnings.

“That does not scream cheap to me,” he said.

“The oil price has fallen and companies have cut capital expenditure and are cutting production targets. The free cash-flow yield doesn’t necessarily cover the dividend yield, which throws up whether the dividend is stable.”