Bellevue Sustainable Entrepreneur Europe (Lux)

European equities as measured by the Stoxx 600 reverted the positive July trend, falling 5.1% 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’s firm inflation-fighting intentions even at the risk of over-tightening. EZ inflation rose to a record 9.1% in August with core inflation up to 4.2% versus 4% expected, signaling the likelihood a higher 75 bps hike for the upcoming ECB meeting. Record increases in gas and electricity prices risk dragging Europe into recession as signaled by the EUR/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 (+3.2%), financials (-2.0%) and consumer staples (-3.5%) holding up best, while real estate (-11.6%), information technology (-8.3%) and industrials (-7.9%) lagged the most.

Against this backdrop, the fund dropped 5.7% (EUR / B shares, a 70 bps underperformance versus its benchmark.

Main detractors in the month were Synlab (-21.1%), Sopra Steria (-14.9%) and Kuehne & Nagel (-11.4%). Synlab delivered Q2 results above consensus expectations, but was prudent with its full year margin guidance which was left unchanged in view of the current uncertainty atound inflation. The company continues to present very defensive growth characteristics and trades at a 30% discount to its peers. Sopra Steria corrected along with the tech sector, on no specific news, despite very encouraging Q2 results beating consensus expectations. Kuehne & Nagel experienced profit taking after the publication of solid Q2 results, which led to a modest upward revision of consensus estimates. We expect pricing to have peaked, but to remain elevated for a while, leading to a still attractive valuation and a rock-solid dividend yield above 4%.

Top performers in the month were Hannover Rueck (+6.2%), Bankinter (+6.2%) and Aker BP (+5.8%). Hannover Rueck reported earnings well above consensus expectations, driven mainly by investment income, and confirmed its full year guidance, which can be seen now as conservative. 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. Aker BP rose during the month along with the energy sector, but also in the aftermath of a solid Q2 publications, characterized by a stronger cash generation and a dividend hike.

“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.