Bellevue Sustainable Entrepreneur Europe (Lux)

European equities, as measured by the SXXR, declined 0.9% in May, with the topic of inflation, China lock down and geopolitics still prevailing. Inflation in the EZ increased sequentially to new records, pushing government bond yields further up. Most central banks have either continued to tighten (Fed, BOE) or have signalled their willingness to do so (ECB). So far the scenario of an imminent recession is not supported by economic data. In the US, retail sales and industrial production surprised positively, while in the Eurozone consumer confidence fell while business surveys remained on healthy levels. Flash EZ Composite PMI declined slightly to 54.9 in May from 55.8 in April, with services still reporting strong growth from pent-up pandemic demand, while manufacturing output only saw a modest expansion. In term of sector performance, energy (+10.1%), banks (+6.3%) and automobiles and parts (+6.2%) performed best, while media (-6.3%), food, beverage and tobacco (-4.9%) and real estate (-4.8%) lagged the most.

Against this backdrop, the fund declined 1.6% (EUR / B shares), underperforming its benchmark by 64 bps.

Bottom 3 performers in the month were Mowi (-9.7%), Publicis (-11.6%) and Sika (-12.1%). Mowi, the Norwegian salmon producer, experienced some profit taking after delivering Q1 results in line with expectations but with slightly reduced market growth expectations. Publicis suffered in the wake of Snapchat’s and Wallmart’s profit warnings. Our media channel checks suggest marketing budgets are holding up well, which was confirmed at the Publicis AGM. In terms of valuation, FCF yield of 11.5% integrates a significant slowdown, bearing in mind that it proved historically resilient during economic downturns and that the new and higher share of digital/consulting in the business mix should help underpin growth.

Top 3 contributors in the month were Subsea 7 (+22.2%), Synlab (+33%) and Lundin Energy (+13.7%). Given the recovery in energy prices, new project tenders are increasing for Subsea 7 – both for conventional subsea work and for offshore wind, as shown by the recent win of the Buzios 8 field in Brazil, a major contract representing more than 10% of its backlog. The company has material operational gearing and higher revenue should enable stronger margins over time as pricing improves and fleet utilization picks up. Synlab reacted positively to a strong set of Q1 results, clearly beating consensus by more than 30% at the operating level, as well as an increased guidance for both sales and profitability, on the back of higher COVID sales. We continue to like the group’s defensive growth profile and attractive valuation. Lundin Energy reached an historical high on the back of rising oil prices.

Following the war on Ukraine market dislocations have been massive. In Europe, the sectors of energy and basic materials have shot up overnight, while tech or retail have lost 25 to 30%. The European Stoxx 600 is only down 8% ytd but this hides great discrepancies.

Overall, inflation remains THE topic. From being negligible, then higher but transitory, inflation has quickly reached levels not seen since the 80s. While energy prices, raw materials or shipping costs are likely to normalize at some point, we also see factors, such as reshoring or the increased need for renewables likely to impact in the longterm. If sequentially we could be close to peak inflation, there are reasons to believe the new normal is higher for longer. In this context we favor companies with strong pricing power, high margin, little Capex needs and strong balance sheet. Also, market dislocations start to offer interesting selective entry levels. The bubble hast burst in high growth stocks with corrections of 50-60% and cyclicals both industrials and consumers trade at historic depressed valuations.