Hedgeweek exclusive: Lombardi Capital founder – and ex-Soros PM – Igor Kryca explains why some US investors are wrong about European equity markets and highlights the opportunities the lack competition is creating.
- Many US investors have long avoided European equity markets – and 2022 didn’t help
- But a lot of their concerns are ‘overinflated’ and may even prove to be unfounded
- There are few European-focused funds to capitalize on dislocation and opportunities
By Igor Kryca
Founder and CIO, Lombardi Capital
The European equity market has had one of its best starts to a year in a quarter of a century. And yet, many stocks are cheap, the wider consensus is negative, and there is a dearth of European-focused funds to capitalize on this dislocation.
In our view, the current valuations, positioning, and investor sentiment have created an opportunity set that is the best I have witnessed in over two decades of being active in European markets. While that is not to say this is an environment without risk, the companies in our portfolio have been delivering surprisingly good results.
It is early days at Lombardi Capital – we set up in late 2021 and launched in August 2022 – but we continue to see enormous dispersion in earnings estimates and valuations across Europe, creating a ripe environment for alpha generation on both sides of the portfolio.
Many US investors have considered Europe untouchable for years. The events of 2022 helped to push the sentiment towards Europe even lower, stemming from fears around the war in Ukraine, energy availability and costs, and the impact of China lockdowns on European exports.
At the start of 2023, Europe is trading on a record discount relative to the US, with the STOXX 600 trading on 12x forward earnings and the S&P 500 trading on 17x. This is partially a consequence of positioning, with Europe equity funds having seen a record-setting 46-week redemption streak through to the end of 2022.
Many of the fears referenced above are overinflated and may even prove to be unfounded, two examples being European natural gas prices returning to pre-war levels, and China easing lockdowns.
The team here at Lombardi has been developing its investment framework for 20 years. Prior to this, we ran a European equity long/short strategy at Soros for seven years. Before that, I ran the short book at AKO and was a fundamental equity analyst at Renaissance Technologies.
Our long ideas are an outcome of our extensive knowledge of industries, companies, and management teams across Europe. They generally tend to be companies undergoing meaningful, and usually misunderstood, change. We assess the quality of the company’s management team and its assets and are generally drawn to business models that are resilient and difficult to disintermediate.
There are also see excellent opportunities to short companies, combining our forensic accounting expertise with deep fundamental research to identify businesses with structural or cyclical pressures that are not yet fully recognized by the market. After more than a decade of ultra-low interest rates and pervasive complacency, we find companies whose financial shenanigans are being brought to light by the rising interest rates and more challenging macro conditions.
In summary, this is the biggest opportunity in European equities I’ve seen in the past 20 years – and our aim is to capitalise on the gap between staled perception and underlying performance to generate alpha on both sides of our portfolio.
Igor Kryca is the founder and CIO of Lombardi Capital, a London-based equities specialist hedge fund manager. His insights will feature in Hedgeweek’s next research report, due later this month. To receive this report, and others in our monthly ‘Insights’ series, follow this link.
