Bellevue Entrepreneur Europe Small (Lux)

European small and mid caps, as measured by the MSCI Europe Small Cap ex-UK, reverted the positive July trend falling 5.9% in the month underpinned by more hawkish statements by Fed Chair Powell. Jackson Hole definitely buried the “Pivot” scenario and pulled the rug from risk appetite as Powell reaffirmed the Fed/USD hitting a 20-year low, falling below parity. Oil was lower with WTI down 9.2%. On a more positive side, soft commodities weakened, reverting to levels seen before the outbreak of the Ukraine war. Sector performance presented a patchy picture, with energy (+5.3%), financials (-0.7%) and communication services (-4.9%) holding up best while information technology (-10.7%), Healthcare (-8.1%) and consumer staples (-7.5%) lagged the most.

Against this backdrop, the fund fell 5.7% (EUR / B shares), a 23 bps outperformance versus its benchmark.

Main detractors in the month were Sopra Steria (-14.9%), Zur Rose (-32.5%) and Bakkafrost (-13.2%). Sopra Steria corrected along with the tech sector, on no specific news, despite very encouraging Q2 results beating consensus expectations. Zur Rose fell sharply on new concerns around the introduction of the e-prescription in Germany. Local media reported that Schleswig-Holstein, scheduled to start the program on September 1, was pulling out due to concerns about patient’s data protection. With some delay, the German government reacted, signaling a speedy roll-out and confirming the safe handling of e-scripts via pharmacy apps. Finally, on September 1, Zur Rose announced the issuance of a convertible and a capital increase which was fully subscribed, addressing the potential refinancing issue of 2023. After a strong ytd share price performance, Bakkafrost suffered some profit taking amid softening salmon prices and slightly disappointing Q2 figures.

Top performers in the month were U-Blox (+22.2%), Bankinter (+6.2%) and Schoeller Bleckmann (+8.1%). U-Blox, the Swiss specialist of IoT chips and modules, continued to enjoy a positive momentum thanks to a strong H1 beat and another guidance hike. Market demand is further accelerating across all regions and application sectors, and the new products have found very good response, boding well for further design wins. Bankinter partly reverted previous month’s losses, after the Spanish banking sector initially over-reacted to the unexpected decision by the government to impose an exceptional tax on “excess” earnings. Schoeller Bleckman, the Austrian specialist of directional drilling technology for the oil and gas industry, reported positive H2 results, revealing strong dynamics driven by a boost in spending for exploration and production outside of Russia.

“Everything is driven by macro, but no one really knows what the macro is going to be”. Interest rates are fundamental to the different market style returns. Low multiple stocks (value) gain over high multiple stocks (growth) when interest rate rise. In this cycle however, timing and magnitude of the interest rate moves are very hard to predict and the relative performance of value vs growth follows the near erratic ups and downs of rates from month to month. Growth stocks multiples have come down significantly since 2021 but remain well above historical average. Value stocks on the other hand might be cheap but valuation alone is not enough, especially if it comes with weak stability in the potential scenario of a future earnings recession. At present we feel the discussion of value vs growth is less relevant for alpha generation and we want to focus on cashflow resilience in the face of overall growth and inflation headwinds. Look for companies with high FCF yields and good cash conversion in attractive market niches.