The Belgian Discount

Belgian Blues: Unraveling the Discount in the Belgian Stock Market

Gone are the days of the mythical Belgian Dentist, taking the train to Luxemburg, cutting some coupons and enjoying the good life. First, central banks drove rates into negative territory. Desperate for yield, the Dentist could find yield consolation with a few high dividend yield stocks. Alas, the Latter Day Dentists got kicked in the butt once more when dividends dwindled as earnings collapsed. AB Inbev, Telenet, Proximus are a few screaming examples. Fortunately, the real estate boom delivered juicy stock market returns. At least, until the ECB drastically increased rates again. Real estate stocks took a beating in 2022. Billions in market value evaporated. So far, 2023 has not brought much solace.

When Belgian companies published their results, there was not much cheering. Whether it was Solvay with blow-out results, or D’Ieteren, that continued its strong growth, or Ackermans, with record results and boasting a strong war chest, all those wonderful results were to no avail. The market at best gave a bored yawn. Occasionally, share prices even took a dive. So, why is this happening? When a stock reacts badly to good news, there can be various reasons. The most obvious one being that the good news was already in the price (“sell the news”). One way to check this is by comparing consensus numbers with actual numbers. When we apply this to the Belgian results, we often saw companies (strongly) beating expectations. Another way to check is by examining valuations. If stocks are really overvalued, they will eventually crumble under their own weight. However, when assessing Belgian stocks based on valuation parameters, there is no sign of overvaluation, on the contrary. Apart from rare exceptions like Lotus Bakeries those stocks are cheap. Based on a broker’s estimates for 2024 the following price-earnings ratios can be obtained: D’Ieteren 11.7x, Ackermans, Cofinimmo and Euronext all 11.1x, Solvay 10.3x, EVS 9.2x, Bekaert 8.7x, Ageas and KBC 7.5x. It’s hard to think that these are all “value traps”. Value traps are cheap stocks that end up going down the drain, like bpost painfully illustrated.

 

Unseen Value in the Shadow of Giants

We call it “the Belgian Discount”. Like in a shop during sales, goods are priced down 20% or 30%. But in the stock market this rather chases away potential buyers. There may be several reasons. From a global market perspective, markets are infatuated with Big Tech. Year-to-date Nvidia is up 172%, Salesforce 62%, Amazon 46% and Microsoft and Apple around 38%. Over the same period the Bel20 is down a sad 4% vs. Stoxx 600 up 7% or DAX up 14%. Worst performers are Umicore (-23%), Proximus (-19%), Aedifica (-16%), Elia (-14%), Cofinimmo (-13%) and AB Inbev/D’Ieteren (both down about 10%). Only a handful are doing reasonably well: UCB +10%, Melexis +7%, Barco +6.5% and Argenx +5%. The real outperformers are not even a member of the Bel20: Colruyt +45%, Nyxoah +40%, Exmar +37%, Telenet +31% and Fagron +26%. An “odd bunch” meaning that there is not much correlation between these companies (different sectors, size, and financials).

Belgian equities are left standing by the wall. Will these wilted wallflowers ever blossom again? A revival of the Belgian market is impossible to predict. The environment doesn’t seem ripe. Global investors prefer Big Tech and Big Global Quality stocks (cfr LVMH, L’Oréal). Furthermore, ETF’s, theme investing, passive investing and algorithmic trading are dominant market forces. Belgian stocks rarely fit one of those baskets and if they do, there usually is a liquidity problem. Materialise did fit the fancy theme of digital printing and was part of an ETF, but because of its small size and restricted liquidity its valuation was totally blown up. A well-functioning market reaches “fair” valuation, not under- or overvaluation. It doesn’t help that the number of funds investing in Belgian stocks has shrunk. The number of stocks is dwindling as well. Some nice companies were taken private, whereas the number of IPO’s is extremely limited. By contrast, in the eighties and nineties we saw a stream of great companies coming to the market (Côte D’Or, Ackermans, Lotus, Sioen, Van de Velde, etc.). We do have a few ecosystems that could provide us with wonderful companies. Think of the semiconductor field (Imec) or biotech/pharma (VIB). They are a tremendous boost for our economy, but not enough for our stock market.

 

In Need of a Revival, Not a Miracle

When the stock market is in the news, it is mostly in a negative way (banking crisis, bpost). The Belgian stock market backwater stands in sharp contrast to the bustling “bourse” of Amsterdam. The Dutch cleverly attract foreign companies offering tax-friendly juridical entities and a vibrant financial ecosystem. Liquidity is key for a well-functioning market. Maurice Lippens, former chairman of Fortis, once called Euronext Brussels a “Mickey Mouse Market”. Mickey Mouse is almost 100 years old and still doing fine. The Brussels stock market is a lot older but could do with a kickstart. Investors would love to invest in new mid-sized profitably growing companies. Unfortunately, most if not all of these Belgian companies prefer to remain private. For a revival of the Belgian market, one cannot count on stimulating initiatives from either politicians or stock market authorities. Companies will have to show continued superior strength in order to attract international investors.

Stock “discoveries” will occasionally fire up the market.  Although stocks in the short run follow a “random walk” - prices go up and down for no particular reason -, serious stock moves mostly are not just arbitrary. Simplified, there could be three kinds of catalysts. First, there is the broad market move. A perfect example was the lowering of interest rates by the ECB that lifted all European stocks. Big external shocks like the outbreak of covid or the invasion of Ukraine also lead to massive, indiscriminate moves from which there is no escape. Real estate stocks got killed in 2022 because of the unexpected, rapid raise of interest rates. A second movement is caused by what market participants call sector rotation. Think of a school of fish that swims in a coordinated manner. All of a sudden, for no apparent reason, the school can change direction. All fish follow, lest they end up in the mouth of a predator. The third move is perhaps the most obvious one. When a company publishes unexpected, good news that has a big impact on its business prospects, then its share price will move sharply.

 

The Fortune-Tellers of Wall Street with a Belgian Blind Spot

A lot can be said about the impact of analyst reports. It is interesting to note that analysts’ price targets for most Belgian stocks are higher than the current share prices, sometimes a lot higher. But there often is a discrepancy between the views of Belgian and foreign analysts. Analysts at big, international investment banks cover a whole sector. They may be equally biased as they “push” their “preferred stocks” and batter “least preferred stocks”. Belgian stocks often end up in the least preferred basket. Sometimes rightly so, but sometimes one finds flawed reasoning or downright intellectual dishonesty. Sometimes analysts simply don’t believe management. It will take a willing suspension of disbelief for Anglo-Saxon analysts and investors to endorse the new paradigm for Solvay and Bekaert. After a thorough overhaul by new management these companies have produced record results. But will it last? It might take a few more years of building a strong track record for the markets to really start rerating these stocks.

 

Caught in the 'R-Word' and Culture Wars

Of course, there may be a rather mundane explanation for the weakness of Belgian stocks. The dreaded “R-word” is dominating the Anglo-Saxon news. The market may assume that a recession in Germany automatically translates into weakness for Belgian industrials. Add to that the institutional aversion for small caps – most Belgian stocks are at best “midcaps” in the eyes of global investors – and the end of the real estate boom and you end up with a lot of discounts. Real estate, biotech and holding companies, typical Belgian strongholds, are all out of favour. On top of all that there is the small appetite of the Belgian retail investor et voilà: Bruxelles n’est pas MAMAA (Microsoft, Apple, Meta, Alphabet and Amazon). AB Inbev, by far the largest beer company in the world and the only true “big cap” on Brussels Euronext, got caught in the nasty American culture war. It’s market cap hovers around €100 billion. That comes down to a five percent move in Microsoft’s market cap. The big pool of beer profits is peanuts compared to what Microsoft earned last fiscal year: $72.7 billion. No wonder our beer giant suddenly looks like a dwarf. In that sense, even AB Inbev reflects the Belgian discount. Since 2015, Microsoft’s share price increased fivefold. Over the same period, AB Inbev’s market cap halved. AB Inbev is still paying for its “cardinal sin”. In 2016, it overpaid grossly for its largest acquisition (SAB Miller). Worse, it loaded itself with debt. Fortunately, net debt has come down from $118 billion to around $64 billion. But the American “mess up” has once more incapacitated AB Inbev on its long road to recovery.

 

The Belgian Dentist: Seeking the Perfect Smile through Patience and Dividends

After a brief stint in the sun even Sofina is suffering from the Belgian discount. Its exposure to high growth companies is not enough to lure foreign investors. On the contrary, shorts are still on the move. The sad conclusion is that most Belgian stocks suffer from a valuation discount. Nevertheless, in the long run market prices are determined by cash flow and return on investment. Studying the potential of most Belgian companies there is no need to despair. Good financial performances will eventually be recognized. But it takes a catalyst to get the momentum going. Belgian companies have a purpose. Their investors need patience. The rewards will hopefully come later. While waiting, investors can enjoy decent dividends. In the end, the Belgian Dentist may get his fair share, after all.