Bellevue Entrepreneur Europe Small (Lux)

European small and mid caps declined -4.2% in August, underperforming the broader indexes (SXXR -3.3%). After concerns about the potential collapse of the Chinese real estate giant Evergrande, investor’s attention shifted to inflation risks and a more hawkish Fed with yields rising quickly. Commodities were also on the rise witness oil peaking at USD 79 pba, ahead of pre-crisis levels. In term of macro surveys, the Eurozone PMI Composite declined to 56.1 in September from 59.0 in August, with both services (56.3) and manufacturing (55.6) sequentially decelerating but remaining well in expansion territory. In terms of sectors, cyclicals and value outperformed defensives/growth, which typically display higher negative sensitivity to rising LT rates. Energy (+9.5%), communication services (+1.4%) and financials (+0.6%) performed best while real estate (-9.2%), information technology (-7.9%) and materials (-6.2%) lagged the most.

Against this backdrop, the fund declined 4.3% (EUR / B shares), 8 bp below its benchmark.

Main detractors in the month were Wartsila (-13.0%), Duerr (-10.7%) and Alten (-8.9%). Wartsila, Finish manufacturer of boat engines and power generators, suffered some profit taking following a strong share price performance. Despite strength in service orders, demand for new equipment is slow to recover and the new CEO offered little visibility. We expect some more information in the upcoming November CMD. Duerr suffered sentiment wise from the ongoing difficulties of the auto sector as well as supply chain bottlenecks and input cost inflation. Alten, the French R&D outsourcing specialist, published H1 results marked by a faster than expected rebound of profitability, driven by a high utilization rate. Our recent company contact confirmed that the level of activity remains very healthy, with no indirect impacts from supply chain issues. Alten’s main challenges remain recruitment and the control of wage costs, although rising salary inflation is mostly passed through to customers. After a very strong performance the shares consolidated.

Top performers in the month were Subsea 7 (+16.7%), Unicaja (+15.3%) and Flughafen Zürich (+9.8%). Subsea 7, the Norwegian energy services company benefited from a more positive sentiment around higher oil prices inducing a good level of commercial activity as shown by the USD 750 mn EPCI contract announced at the end of the month. In a more favorable interest rates environment the Spanish bank Unicaja, has been gradually catching up with peers as the merger process with Liberbank is progressing. This should underpin a positive earning outlook, supported by EUR 150 mn costs synergies. Flughafen Zürich, like most travel and leisure stocks, traded firmer. Short-term air traffic volumes indications have been positive and we expect this trend to continue until year end in to the autumn school holidays and the Christmas season. Starting November, airlines will have to operate at least 50% of their 2019 capacity, in order not to lose airport slots. Also, higher vaccine rates and Merck’s new Covid treatment.

PMIs are weakening and inflation is rising both driven by demand/supply in-balances and supply chain disruptions. Society has been more or less switched off during 18 months and the system needs to adjust to a new and higher level of demand but JIT supply chains are not able to cope with such a kick-start. Spot inflation will normalize over time, although the absolute level should be above pre-pandemia. We do not adhere to a stagflation scenario and expect growth to return driven by large pent-up demand as COVID recedes and output is debottlenecked. During the month, we have initiated a new position in BE Semiconductor, a Dutch wafer fab equipment maker, specialized in die attach and packaging. With H1 21 EBIT margin of 41%, BESI is highly profitable and has cash on its balance sheet. Currently trading on 13.5x 2022 EV/EBIT, a 3 year low, the stock is attractively valued in the semi space.