Bellevue Entrepreneur Europe Small

European small and mid caps, as measured by the MSCI Europe Small Cap ex-UK, declined 2.5% in March, outperforming European large caps (SXXR -3.8%) and the MSCI World (-4.6%). With this, Q1 25 marked the biggest quarterly positive performance gap between the STOXX 600 and the S&P 500 in a decade. March was tumultuous with widespread imposition of tariffs by the US. Investors became increasingly concerned about a possible US stagflation scenario with higher inflation and very weak economic growth. Europe confirmed its fiscal shift moving towards significantly higher defence spending, while the incoming German coalition proposed a key reform of the constitutional debt brake to permit higher defence spending, alongside a EUR 500 bn infrastructure fund. Encouragingly, European PMIs increased for a third consecutive month (50.4 after 50.2), led by the manufacturing component (26m high at 48.7), with a notable increase of the output (50.7), for the first time in two years. In term of sectors, utilities (+6.0%), financials (+1.5%) and communication services (+1.5%) performed best while healthcare (-7.7%), consumer discretionary (-7.6%) and consumer staples (-3.4%) lagged the most.

Against this backdrop, the fund decreased 2.3%, outperforming its benchmark by 14 bps (+142 bps ytd).

Top detractors in the month were Do&Co (-24.9%), Metso (-10.9%), and LEG Immobilien (-18.3%). Do&Co was impacted by recent cautious comments from US airlines, raising uncertainty about air traffic even though the weaknesses was observed in the domestic market and on economy where Do&Co has little exposure. Metso experienced some profit taking after a 22% ytd run. Equipment orders can be lumpy and since there has been few announcements, the expectation is for sequential declining volumes in Q1 despite strengthening gold and copper prices. Leg Immobilien suffered alongside the German real estate sector from fast rising rates following the announcement of the new ambitious fiscal policy.

Top performers in the month were Grupo Catalana (+22.7%), Nordex (+11.0%) and Bankinter (+9.8%). The Spanish insurer Grupo Catalana benefited from a buyout offer from the founding Serra family. The offer comes at EUR 50, a 29% premium to the ytd share price average. We would not exclude an improvement of the conditions and deem the fair price closer to EUR 60. Nordex continued on its upward trend, helped by the perspective of higher infrastructure investments in Germany where the company holds a market share of 30%. With a more favourable outlook for interest rates (higher for longer), a steeper yield curve and positive loan volumes growth there is still upside for Spanish bank names and both Unicaja and Bankinter continue to benefit.

Macro and the top down narrative continue to dominate and markets show nervousness ahead of Trump’s further tariff announcements. Against the odds, European equities have experienced a historic and surprising positive start to the year, strongly outperforming the US. From the Trump Put attention has pivoted to the Merz Bazooka and a newfound European fiscal optimism. After years of outflows starting with the Ukraine war, we now see capital returning to Europe. Small and mid caps have not yet benefited and valuations remain attractive. There is room for Europe to extend its lead as the risk/reward profile is strong. Value is also back in trend and we benefit from our diversified style approach. The US exposure of our portfolio companies is equally broad and diversified with a third of positions being pure European local champions.