This is an article based on the transcript of the recording of this Talking Heads podcast
Andrew Craig: Hello and welcome to the BNP Paribas Asset Management Talking Heads podcast. Every week, Talking Heads will bring you in-depth insights and analysis on the topics that really matter to investors. I’m Andy Craig, Co-head of the Investment Insights Centre, and I’m joined today by Valerie Charrière, Deputy Head of European Large-cap Equities at BNP Paribas Asset Management. Welcome, Valerie, and thanks for joining me.
Valérie Charrière: Thank you, Andrew. It’s great to be here.
AC: In this episode, we are discussing our approach to actively managing European equities. How do you select stocks? Do you have a particular bias, and if so, what is it?
VC: We have a team of nine portfolio managers/analysts, and we are dedicated to fundamental stock-picking: picking 35 to 45 best quality stocks whose quality and strengths we can clearly assess.
AC: That begs the question, what are the characteristics of a stock that you would consider make it outstanding with a view to investing?
VC: Quality companies are highly correlated with what we call pricing power. A company’s pricing power gives better predictability in terms of sales momentum or margin improvement. When picking quality companies, we first need to assess the industry structure in which the company is active and then look at the company’s competitive advantage within that industry.
We pay great attention to understanding what’s happening to each industry: Is it consolidating or already consolidated? Industry structure is a key determinant of quality. When you invest in a sector which is consolidating or where there are fewer players, you have de facto some stability in terms of the pricing power of the industry leaders.
It’s important for us understand whether the leaders we identify in a given industry can sustain that advantage over the medium term. For example, do they have a specific advantage that is not easy for their competitors to replicate such as their scale or a particular technology? Their advantage could also be a change in management with a better vision or it could come from disruption in the sector. There are several aspects to understanding each company’s quality.
AC: Is it possible to have a quality company in a sector that you don’t consider has all the attributes of a ‘safe’ sector – one not vulnerable to rapid change? Or do you select the sector first and then search for the outstanding companies in it?
VC: As sector specialists, we first identify a growing industry, even if it is not yet well-structured, or it is on the verge of consolidating because there are too many players.
We identify the specific attributes of a company in the sector, be it related to technology, its end market or that its relationship with the suppliers is unique.
Perhaps most difficult is when we deal with large-capitalisation equity – there can be many divisions, market segments and various industries. We need to understand the evolution of market share in each division or in each of the company’s business units. This takes time, but is rewarding because in the end we can say with some certainty that the attributes of the company are right, and this is a company which is in a consolidating industry.
AC: Could you give an example of an industry you would see as favourable and one that you see as not so positive?
VC: What’s interesting in analysing industry structure is that it’s always moving. One industry that has been consolidating a lot is industrial gases; there is a high correlation between fewer actors and impressive improvement in terms of margins, so we used to [invest in] two companies, convinced about the merits of consolidation and the way the pricing power could develop.
We also invest in sectors that are more fragmented. In food retail, for instance, the internet and e-commerce has led to accelerating fragmentation, so it’s more difficult to find the right player because we have to be mindful of price war discounters.
AC: How is your approach different from other European stock pickers?
VC: Our disciplined approach to in-depth research and understanding different industries makes our team unique compared to competitors. Our team decision-making process is also important: No-one owns the whole picture, even if a sector specialist. We need to come up with a solid case that we discuss together before coming to a consensus via a vote.
AC: Looking at the European equity market more broadly, how do you see it evolving between now the end of the year? There’s much talk about equity valuations being stretched – what’s your view?
VC: European equities have gained 10% year-to-date and on a 12-month basis, it’s still seen appreciable double-digit growth. At this juncture, there’s probably some stretched value. We see a mild recession priced in and the next quarter will be a reality check in terms of what’s happening with consumers, the pricing by companies since Covid and higher commodities prices.
For us, the asset class offers attractive diversification. The market is not driven by seven ‘super stocks’ – as it is in the US – but we have a broader choice in terms of financials, industrials and luxury goods. We believe the asset class still has more value to offer and we remain positive about our stock selection. Since we are invested in quality companies, we believe they can absorb economic shocks or geopolitical challenges better than their peers.
AC: Financials account for about 15% of the European equity market. What other sectors have big weights in the composition of the market?
VC: Industrials, capital goods and luxury goods, including the cosmetics and beauty markets, are strong in Europe. It’s interesting that even a major US cosmetics company is currently looking at being listed on the Paris Stock Exchange to benefit from this halo effect from luxury goods alongside the top French-based brand names.
AC: Environmental, social and governance considerations are fundamental to your approach. How do you take ESG factors into account in your stock picking?
VC: Our proprietary research into each case allows for the integration of the company’s ESG score, which is provided by BNP Paribas Asset Management’s Sustainability Centre. We make sure we understand the score and exchange views with extra-financial analysts who can provide insights into the companies in terms of ESG issues that our financial analysts don’t have. In our portfolio construction, we also consider engagement, whenever we believe the company can do better.
So, we take into account all the knowledge and expertise that the Sustainability Centre can bring us, and with our voting rights as a shareholder, we can have a positive impact on company policy.
AC: Valerie, thank you very much for joining me.
VC: Thank you, Andrew.