Latest cash flow analysis highlights inexpensive valuations
Many companies in Europe have December year ends, meaning they issue associated report & accounts in April or May. Using this fresh set of accounts, we have been able to significantly update the dataset to which we apply the Cashflow Solution investment process.
The most striking takeaway is that despite their strong performance, Europe’s best cash flow stocks are still inexpensive. Our analysis shows the group of stocks we characterise as ‘good cash flow stocks’ have rallied strongly from their very low valuations a few months ago, but they remain good value at current levels.
The MSCI Europe ex-UK Index has outperformed the US S&P 500 Index by 20% so far this year (sterling terms, to 03.06.25) as investors have sought broader international exposure in the face of the ongoing uncertainty around Trump’s trade policies and some volatility in US tech mega-caps following China’s disruptive progress in AI.
We use proprietary cash flow data and ratios to create a composite ranking of the European universe. The top 20% of this list is what we call the Cashflow Champions – our watchlist from which we populate portfolios after further qualitative analysis.
Taking the average of these stocks, valuations are still one standard deviation below the cohort’s long-term average. This means that over the 35-year dataset we analyse, the most cash generative stocks are normally – around 85% of the time – more expensive than they are today.
Supplementing benign valuation backdrop with tools targeting alpha
While the valuation backdrop is very supportive for investing based on cash flow, our investment process also aims to add alpha above and beyond this through the application of market regime analysis and the use of secondary cash flow scores.
Our market regime indicators allow us to identify and analyse prevailing conditions, while secondary cash flow scores enable us to modify portfolio exposure to emphasise different company characteristics for that environment.
Currently, our investment process suggests portfolios should have good balance by style exposure, embracing the most attractively valued cash generative companies with growth, value or quality characteristics.
No tariff impact on cash flows yet
The tariff announcement by the Trump administration in April 2024 represented a significant exogenous shock for global markets. While many of the proposed measures have since been paused pending further negotiations, the longer-term policy direction and its market implications remain uncertain.
We will assess any potential impacts from tariff developments strictly through the lens of our investment process, which begins with quantitative cash flow screening. Any knock-on effects from tariffs—whether through margins, supply chains or investment behaviour—would take time to be reflected in our data.
A strong track record of responding to market dislocation
While the process is not designed to anticipate geopolitical shocks, it has historically proven effective at responding to such dynamics and reallocating capital in ways that reflect emerging risks and opportunities.
For example, several years ago the mainstay of our portfolios were cash-generative companies with strong growth characteristics, but as stockmarkets tumbled at the start of 2020 due to the threat of Covid-19, the investment process led us to adopt a contrarian position in emphasising deep value as a style – a repositioning which paid off as these unloved stocks recovered strongly. At the same time, stocks with high forecasts of growth were looking overvalued and vulnerable, so we trimmed this exposure right back.
Today, one of our indicators that guides us on style positioning – and proved very valuable during the covid-19 pandemic and our funds’ subsequent rotation to value – is now around the long-term average. This suggests a balanced approach at this point.
Attractive valuations; an uptrend; and good corporate cash flow behaviour
At the current time, and despite the volatility over the last few weeks and months, our assessment of the European outlook remains stable and positive: valuations are attractive, stockmarkets remain in an uptrend, and there is little sign of the kind of poor corporate investment that would lead us to be more cautious.
KEY RISKS
Past performance does not predict future returns. You may get back less than you originally invested.
We recommend this fund is held long term (minimum period of 5 years). We recommend that you hold this fund as part of a diversified portfolio of investments.
The Funds managed by the Cashflow Solution team:
- May hold overseas investments that may carry a higher currency risk. They are valued by reference to their local currency which may move up or down when compared to the currency of a Fund.
- May have a concentrated portfolio, i.e. hold a limited number of investments (35 or fewer) or have significant sector or factor exposures. If one of these investments or sectors / factors fall in value this can have a greater impact on the Fund's value than if it held a larger number of investments across a more diversified portfolio.
- May, under certain circumstances, invest in derivatives, but it is not intended that their use will materially affect volatility. Derivatives are used to protect against currencies, credit and interest rate moves or for investment purposes. There is a risk that losses could be made on derivative positions or that the counterparties could fail to complete on transactions. The use of derivatives may create leverage or gearing resulting in potentially greater volatility or fluctuations in the net asset value of the Fund. A relatively small movement in the value of a derivative's underlying investment may have a larger impact, positive or negative, on the value of a fund than if the underlying investment was held instead. The use of derivative contracts may help us to control Fund volatility in both up and down markets by hedging against the general market.
- The use of derivative instruments that may result in higher cash levels. Cash may be deposited with several credit counterparties (e.g. international banks) or in short-dated bonds. A credit risk arises should one or more of these counterparties be unable to return the deposited cash.
- May encounter liquidity constraints from time to time. The spread between the price you buy and sell shares will reflect the less liquid nature of the underlying holdings.
- Outside of normal conditions, may hold higher levels of cash which may be deposited with several credit counterparties (e.g. International banks). A credit risk arises should one or more of these counterparties be unable to return the deposited cash.
- May target an absolute return. There is no guarantee that an absolute return will be generated over the time period stated in the fund objective or any other time period.
The risks detailed above are reflective of the full range of Funds managed by the Cashflow Solution team and not all of the risks listed are applicable to each individual Fund. For the risks associated with an individual Fund, please refer to its Key Investor Information Document (KIID)/PRIIP KID.
The issue of units/shares in Liontrust Funds may be subject to an initial charge, which will have an impact on the realisable value of the investment, particularly in the short term. Investments should always be considered as long term.
DISCLAIMER
This material is issued by Liontrust Investment Partners LLP (2 Savoy Court, London WC2R 0EZ), authorised and regulated in the UK by the Financial Conduct Authority (FRN 518552) to undertake regulated investment business.
It should not be construed as advice for investment in any product or security mentioned, an offer to buy or sell units/shares of Funds mentioned, or a solicitation to purchase securities in any company or investment product. Examples of stocks are provided for general information only to demonstrate our investment philosophy. The investment being promoted is for units in a fund, not directly in the underlying assets.
This information and analysis is believed to be accurate at the time of publication, but is subject to change without notice. Whilst care has been taken in compiling the content, no representation or warranty is given, whether express or implied, by Liontrust as to its accuracy or completeness, including for external sources (which may have been used) which have not been verified.
This is a marketing communication. Before making an investment, you should read the relevant Prospectus and the Key Investor Information Document (KIID) and/or PRIIP/KID, which provide full product details including investment charges and risks. These documents can be obtained, free of charge, from www.liontrust.com or direct from Liontrust. If you are not a professional investor please consult a regulated financial adviser regarding the suitability of such an investment for you and your personal circumstances.
