Bellevue Sustainable Entrepreneur Europe (Lux)

European equities, as measured by the SXXR, declined 0.7% in April, a more robust performance compared to very weak global and US markets (SPX -8.8% in USD). Geopolitical tensions, growth and inflation scare dominated, with China’s lock downs further weakening the top down picture. Inflation data reached new records in the US and Eurozone and government bond yields kept rising while central banks become more hawkish. In the EZ Q1 GDP increased 0.4% qoq in line with expectations but surprisingly declined 1.4% on an annualized pace in the US. Flash Eurozone PMI rose to a 7-month high of 55.8 in April from 54.9 in March, led by Services (57.7 vs 55.6) which benefited from loosen COVID restrictions, and helped offset the waning manufacturing output (50.4 vs 53.1), impacted by production curbs and ongoing supply constraints. In terms of sector performance, defensives fared better with food, beverage and tobacco (+5.8%), personal care, drug and grocery stores (+4.1%) and utilities (+2.8%) performing best, while technology (-7.1%), financial services (-6.4%) and real estate (-5.9%) lagged the most.

Against this backdrop, the fund declined 1.1% (EUR / B shares), underperforming its benchmark by 38 bps.

High growth and tech companies suffered the most. Bottom 3 performers in the month were BESI (-24.5%), Carl Zeiss (-18.1%) and ASM International (-12.7%). BESI, the Dutch semi equipment manufacturer, reported Q1 revenues and profitability in line with forecasts, but the order intake disappointed due to both China lockdowns and a seemingly weak innovation cycle with Telco clients. Both are likely to normalize through 2022/23, while the announced sector Capex roadmap confirms good growth ahead. With net cash at hands, EBIT margin of 45% and hybrid bonding technology ramping up, we see significant upside potential at valuation <12x EBIT. Carl Zeiss, the German medtech company, was weak on supply chain and profitability concerns. ASM Int. also suffered from market rotation away from tech and high growth names while it delivered solid Q1 results marked notably by record orders confirming increasing production volumes and higher adoption of ALD from foundries.

Top 3 contributors in the month were Essity (+17.8%), Mowi (+10.9%) and Homeserve (+17.3%). Essity provided some relief following concerns about margins, with a Q1 EBIT 21% above consensus and organic sales growth of 14.6%, beating forecasts by 4 pp. This clearly demonstrated the group’s pricing power and ability to protect margins. The Norwegian salmon producer Mowi delivered Q1 results marked by the doubling of its EBIT with salmon prices reaching new highs. After having risen 25% in March on a possible PE takeover, Homeserve continued its upward trend after the Board officially entered into discussions with Brookfield Asset Management. The probability of a takeover has now increased considerably, and we would expect interest from other PE bidders.

After a rebound in March, equity markets are finally catching up with reality. Supply driven issues like availability of goods, commodity price inflation etc. slowly shift to demand side worries around consumer demand and risk to growth. Market sentiment is poor and better than feared Q1 earnings delivery did nothing to change this. The growth category has taken a serious beat with many names down 50% to 60% since the highs of 2021. On the aggregate, sentiment and positioning seem not bearish enough yet for markets to stage a reversal. We remain well diversified across all styles and sectors, favoring quality companies inherent to our Entrepreneur universe squaring strong balance sheets, high margins and capital returns. These times ask for experienced stock picking along the main themes of rising inflation, slowing growth, post Covid reopening, energy dependence and ESG.