Bellevue Entrepreneur Swiss Small & Mid (Lux)

Swiss small and mid caps, as measured by the SPIEX, declined 1.5% in December, after two months of rebound. This compares to -3.3% for the SPI and strengthens the outperformance of the small and mid segment observed since September. Both the Fed and ECB delivered continued hawkish messages, despite first signs of encouraging inflation datapoints. Longterm rates resumed their upward trends, with the Bund topping 2.5%, a level not seen since 2011. Economic indicators from the Eurozone were encouraging. The flash PMI rose for the second consecutive month to 48.8 in December. The less gloomy outlook was confirmed with the final PMI revised up to 49.3, indicating a much moderate GDP contraction for Q4 than initially expected. Especially Germany surprised positively thanks to a sharp improvement of the service component on the back of less concerns around energy shortages and the introduction of an energy price cap. Ifo and ZEW readings also suggested business climate improving at last, which is important for the Swiss perspective. Sector performance was patchy. Media (+5.6%), consumer products and services (+4.7%) and personal care, drug and grocery stores (+4.5%) performed best while automobiles and parts (-9.9%), technology (-7.8%) and basic resources (-4.7%) lagged the most.

Against this backdrop, the fund declined 2.0% (CHF / B shares), a 51 bps underperformance versus its benchmark. This brings ytd performance to -28.7%, 467 bps behind the benchmark.

Main detractors in the month were U-Blox (-8.9%), Bachem (-12.0%) and Skan Group (-8.4%). After being a top performer in November, the IoT specialist U-Blox consolidated in December with no particular news flow. The company aims at revenues of CHF 1 bn in 2025, implying a solid trend growth of 15% pa. Consensus is too low, which together with the current valuation of 5x EBITDA, makes up for significant share price upside. Bachem suffered from sector rotation out of the priciest parts of the market as well as sector read across following another profit warning from Polypeptide. Skan Group also fell victim of rotation out of quality/growth.

Top performers in the month were Burckhardt Compression (+7.8%), Pierer Mobility (+7.4%) and Swatch Group (+6.4%). Burckhardt Compression’s order intake passed the CHF 1 bn mark, confirming the exceptional increase in activity seen throughout all end markets of photovoltaics, LNG, and hydrogen. We continue to like the stock as one of our Top 10 ideas boasting a positive Ytd total return of 30%. Pierer Mobility increased its 2022 revenue guidance from 10%-15% to 15%-20%, as the demand for both bicycles and motorcycles remains strong. We expect consensus to continue to adjust higher. While a return to normal will only be gradual, China relaxing COVID measures was a clear positive for the luxury sector and notably Swatch.

It is an understatement to say 2022 did not pan out as expected. After the exogenous pandemic shock of 2020, another unexpected event put economic conditions upside down. But all in all, despite the war in Ukraine, Europe and of course Switzerland did prove quiet resilient. The summer post-COVID catch-up was beneficial and the labor market remained strong. On the industrial side, new orders fell amid the global slowdown, but the extraordinary levels of backlog helped sustain production activity. Also, compared to the most alarmist scenarios, the energy crisis did not prove catastrophic. Consumption was curbed and luckily mild temperatures allowed for a slow depletion of gas storage. For 2023 not everything is gloom. A cyclical disinflation phase is under way and already noticeable at the level of production/goods and energy, which have passed their peak. Also, after the volte face on COVID, we should be in for an economic rebound in China. Risks remain and are well known: higher energy bills for corporates and households, higher structural and cyclical inflation for a while still and lower growth.

After this crazy year, stock picking opportunities abound and valuation dispersion has not diminished. We continue to focus on strong balance sheets, good management and undervalued companies with attractive cashflows. On behalf of the Bellevue Entrepreneur Team, we thank you for your trust and wish you all the best for 2023!