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Positive 2016 ahead, but too soon to go net long European equities, says Quaero Capital

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European equities still present an attractive potential over the long term, but according to systematic analysis used by Quaero Capital’s Argos European Systematic Long Short Equity fund, the optimum market timing conditions to go net Long have not materialised.

For some time the fund’s net investment rate has been 0 per cent (50 per cent long stocks and 50 per cent Short Eurostoxx 50 futures), which has contributed to strong outperformance relative to the HFRX Equity Hedge EUR Index.  
 
Year to date, the fund returned +6.56 per cent, compared to –3.09 per cent for the Index. Since inception on February 20th 2014, it has returned +8.03 per cent, versus -2.65 per cent for the Index, and for the month of December 2015, performance was +3.28 per cent, versus -1.22 per cent for the HFRX Equity Hedge EUR Index. The short contribution to that outperformance was +3.07 per cent while the long added +0.21 per cent.
 
Out of the selected stocks held in December, 77 per cent had a positive absolute price performance (against 59 per cent in November 2015), and 51 per cent showed a price performance above that of the Stoxx 600 Europe index (against 44 per cent in November 2015).
 
The star performer over the period was the French company Derichebourg, which provides recycling and maintenance services to businesses and communities in 31 countries on four continents. It contributed +25 per cent to the Fund's long leg performance, but there were also significant contributions from French automotive part provider Faurecia (+11 per cent), global wind energy stock Vestas (+10 per cent) Lufthansa (+9 per cent) and Swiss digital security specialist Kudelski (+9 per cent).
 
Derichebourg and Vestas benefitted from investors' appetite for green tech and recycling stocks following the December climate change summit in Paris, while Faurecia shares bounced on news of the sale of its Automotive Exteriors division to competitor Plastic Omnium. Lufthansa shares were boosted by the end of three months of labour strikes, in the context of continued weakness in oil prices.
 
On the other hand, the following stocks had the most negative contribution to the Fund’s long leg performance, with an average 9 per cent price decrease while held over the period: Daimler (-12 per cent, Capital & Regional (-11 per cent), Banca Popolare Emilia Romagna (-9 per cent), UBS (-7 per cent) and Norwegian multinational TOMRA Systems (-7 per cent).
 
Daimler shares suffered from a resurgent euro following European Central Bank’s December meeting, where it appeared that stated plans for additional stimulus for the Eurozone would fall short of heated market expectations. We are not aware of any company-specific news that could have had a material negative impact on the stock over the month.
 
Financial stocks generally suffered after the ECB meeting, and clearly impacted our other under-performers. We have not been able to find any company-specific news on Capital & Regional, BPER, or UBS that could have had a material negative impact on their stock prices over the month.

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