Bellevue Entrepreneur Europe Small (Lux)

European small and mid caps, as measured by the MSCI Europe Small Cap ex-UK, rose 2.7% in July, (SXXP +2.1%), sustained by the encouraging downward trend of US inflation. The US economy is showing signs of a gradual slow down giving further credit to the thesis of a soft landing. In Europe, inflation remained high, with the core component flat mom at 5.5% and close to the March record-high of 5.7%. The Eurozone Composite PMI fell to 48.9 in July, down from 49.9 in the previous month, including 51.1 for the Services PMI (52.0 in June) and 42.7 for Manufacturing (43.4). Against this backdrop, the Fed and the ECB raised their rates by a further 25 bps in July, leaving the door open for further hikes. US and German rates increased, with the 10 years back to 2023 highs, but with an encouraging steepening through the curve. The Chinese Politburo Standing Committee launched new easing measures, not on a large scale and with no clear direction but enough to trigger a positive market reaction. Sector wise, energy (+7.4%), real estate (+7.3%) and personal care, drug and grocery stores (+6.4%) performed best while basic resources (-1.6%), travel & leisure (-0.3%) and food, beverage and tobacco (+0.0%) lagged the most.

Against this backdrop, the fund increased 2.5% (EUR / B shares), underperforming its benchmark by 20 bps. This brings the performance of the fund over the first 7 months of 2023 to 14.5%, 508 bps above its benchmark.

Top detractors in the month were Cargotec (-13.8%), Metso (-10.1%) and Alten (-8.3%). Improving sales and growing profitability but falling yoy orders is a difficult juncture for capital goods companies and Cargotec was no exception. Despite 10% top line growth and EBIT margins improving by 270 bps to 13.5%, falling yoy order intake, although well flagged by management was not to the market linking. Cargotec is one of the cheapest industrials in Europe and the upcoming demerger of Kalmar should help crystallise value. Metso reported raising sales and above expectation record EBITA margins of 16.6% for Q2, however new orders declined by 11% yoy. With 40% exposure to copper and battery related metals Metso is well positioned to leverage the energy transition. Alten reported a decent organic revenue growth of +8.6%, but for once fell slightly short of expectations. The company gave a  2023 growth target of 10% implying a stabilization of its growth trend around 10% in H2 and no downward consensus revision. At ca 10x the 12m fwd EBIT, Alten is trading at historical trough levels implying a highly positive risk/reward while long term perspectives are positively underpinned by the electrification and digitization mega trends.

Top performers in the month were Arjo (+17.1%), TF1 (+18.2%) and Wartsilä (+10.8%). Arjo finally delivered a healthy 5% organic sales growth in Q2 triggering a relief rally. The demand picture has started to improve both in the US and Canada, contributing to positive sales growth for the first time since 2021. Lower costs and a more balanced relationship to prices should further help improve margins going forward. TF1 reported H1 operating results 14% above consensus on higher ad revenues and tight control. Encouragingly, TF1, as well as most European TV so far, announced that ad trends turned positive at the beginning of Q3, leading to consensus EPS upgrades of 5% to 10%. TF1 trades on an very low 3.5x 23 EBIT and offers a 8% dividend yield.  Wartsilä reported a positive Q2 with decent activity in the relevant marine segments and good demand for battery storage. At EBIT margin level Wartsilä delivered a consensus beat with energy storage operations posting positive EBIT for the first time.

As Paul Samuelson put it 1982, the equity market has predicted 5 out of 9 recessions. Just in this case markets have been steadily grinding higher while economists were rarely more pessimistic. And it seems the market path of less resistance is still on the upside as the odds of the FED delivering a soft landing are increasing. Germany is the only Economy in a technical recession, but a mild one. Half of companies have reported and a larger than usual proportion have beaten expectations. The setup is similar to last quarter, low hurdle rates into the numbers and improving fundamentals. All sectors except real estate, commodity and consumer are reporting positive yoy EPS growth.