European investing: lessons from the titans of Spanish football

Spanish football has been dominated by Real Madrid and Barcelona for as long as anyone can recall. Other teams have tasted significant success – Athletic Bilbao, Atlético Madrid, Real Sociedad, even Deportivo de La Coruña – but the narrative has traditionally revolved around these two titans.

Their dominance is such that any slip-up is customarily treated as nothing short of a disaster. Draws are regarded as ruinous, while defeats are akin to the end of life as we know it. In effect, short-term stumbles are allowed to completely obscure long-term prospects.

There is a lesson here for investors, because markets are now routinely prone to much the same phenomenon. We recently witnessed it again in Europe, with generally flat Q3 earnings reports leading to numerous companies coming under fire for disappointing performance¹.

Many investors would perhaps be less spooked by these events if they could fully appreciate what triggers them in the first place. Increasingly, a key element of the explanation can be found in the world of investment analysis.

Analysts represent what is known as the “sell side” of the financial industry. They are employed by research-intensive organisations such as fund brokers and large investment banks.

Broadly speaking, their task is to help inform investment decisions. They do this by poring over enormous quantities of data and trying to gauge the appeal of businesses or other assets.

Historically, most analysts preferred a long-term focus. But the rise of hedge funds and high-frequency trading, in tandem with changes in how commission is paid, has compelled many to instead favour a short-term outlook.

As a result, forecasts now often encompass just one or two quarters. This might not be an issue if an analysis is negative – in which instance underperformance can be “priced in” – but it can cause alarm if an analysis turns out to be overly optimistic.

The problem lies in market participants being too quick to infer a temporary blip will translate into permanent difficulties. In other words, they extrapolate short-term underperformance into long-term underperformance.

Such a mindset is akin to that of disgruntled Real Madrid and Barcelona supporters. It frequently turns out to be unnecessarily blinkered, as life in La Liga has shown again and again.

For example, Real have wobbled of late, sparking familiar talk of dismissals and institutional meltdown. But who would bet against them finishing outside the top four – or even the top two – at the end of the season?

Meanwhile, Barça have repeatedly been declared in crisis over the past few years. Yet they still contrived to win a league title in 2022, now hold a clear lead at the top of the table and are suddenly being touted in some circles as the best side in Europe.

Similarly, many of the European companies that have failed to meet earnings expectations still have plenty going for them. Maybe above all, they still have solid fundamentals that are likely to serve them well over time.

This is a vital point for investors with long-term horizons. Hedge funds and day traders may revel in the apparent drama of missed earnings, but there is usually little reason for other market participants to get overexcited.

By way of illustration, the average holding period for a stock in the IFSL Marlborough European Special Situations fund is around five years. Accordingly, we like to take a step back and reflect on whether the investment case for a business that “disappoints” may in fact be every bit as strong as it was previously.

In some cases, crucially, it can actually be stronger than ever. Uncertainty can create buying opportunities, not least when a company whose attractions are essentially undiminished suffers a fall in price.

As fund managers, we represent the “buy side” of the financial industry. This means we can purchase analysts’ research if we wish.

Ultimately, though, our investment decisions are rooted in a strategy of direct engagement. We meet with hundreds of management teams across Europe every year, learning as much as we can about how their businesses operate.

Such an approach can be especially useful in the sphere of European smaller companies. Many of these receive scant coverage from the analysis community – and some might even receive none at all.

This further underlines the importance of looking beyond a low share price. In Europe, as elsewhere, “cheap” companies can still have sound business models, good policies and practices and notable growth potential.

The European economy as a whole is currently said to be undergoing a period of “gradual expansion”². This is a polite way of describing economic slowdown. Hopes of meaningful recovery from the lingering impacts of the COVID-19 pandemic seem to have been pushed out till 2025.

Yet within this subdued bigger picture are many promising, resilient, impressive companies that merit attention. Every one of them will almost inevitably endure ups and downs from time to time, but unsettled investors – like those fickle Real and Barça fans – should always remember it is long-term performance that really counts.

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^1.See, for example, Reuters: “STOXX 600 hits one-month low as bleak earnings weigh, tech stocks slump”, October 30 2024

^2.See, for example, European Commission: “Spring 2024 Economic Forecast: a gradual expansion amid high geopolitical risks”, May 15 2024

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This communication is provided for general information purposes only and should not be construed as personal financial advice to invest in any fund or product. These are the investment manager’s views at the time of writing and should not be construed as investment advice. The opinions expressed are correct at time of writing and may be subject to change. Capital is at risk. The value and income from investments can go down as well as up and are not guaranteed. An investor may get back significantly less than they invest. Past performance is not a reliable indicator of current or future performance and should not be the sole factor considered when selecting funds.