Bellevue Entrepreneur Swiss Small & Mid (Lux)

Swiss small and mid caps, as measured by the SPIEX rose 1.4% in July, outperforming the broader Swiss market (SPI +0.4%), sustained by the encouraging downward trending 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, retail (+9.7%), financial services (+8.3%) and chemicals (+7.6%) performed best, while media (-5.7%), food, beverage & tobacco (-4.4%) and utilities (-1.4%) lagged the most.

Against this backdrop, the fund increased 0.3% in the month (+10.5% ytd, CHF / B shares), underperforming its benchmark by 114 bps (-108 bps ytd).

Main detractors in the month were SFS (-12.2%), LEM Holding (-4.0%) and Montana Aerospace (-5.1%). SFS slightly trimmed its 2023 guidance on the back of softer H1 numbers. Margins were impacted by a negative mix and weakness of the electronic business. We do not see this as structural and expect cyclical improvements as the destocking in electronics and industrial markets come to an end. LEM Holding published very strong quarterly results, with revenue and EBIT growth of 24% and 34% respectively. Order intake was lower with supply chains finally normalizing. This should not come as a surprise and was well flagged by management, nevertheless the market reacted negatively to it. We seized the occasion to increase our position. LEM is a clear beneficiary of rising electrification demand and valuation multiples fall rapidly below the LT average as growth kicks in. While the number of new orders at the Paris Air Show might have disappointed some investors, demand for new aircraft shows no sign of abating while the health of the supply chain is gradually improving. This should benefit Montana Aerospace, a vertically integrated manufacturer of lightweight metallic parts and structures for aerospace and e-mobility.

Top 3 contributors in the month were Sulzer (+11.2%), Gurit (+12.1%), and Kardex (+8.5%).

Sulzer’s Q2 results beat consensus and FY guidance was raised for order intake, sales and profitability. Sulzer benefits from positive demand trends in all its end markets and we await the result of the upcoming CMD and the strategic review of the new management. After a disappointing performance in 2023, Gurit rebounded ahead of its H1 results due in August. Its high margins tooling business, usually a leading indicator for demand, did show significant growth in Q1 (+24.1% org.), which might finally suggest a nearing of the cycle trough. Kardex reported strong H1 results. Against robust demand for intralogistics products, order backlog increased 17%, sales 30% and EBIT 81% on the back of a 150 bps increase in GM and tight costs control. This led to a sharp increase in consensus estimates, offsetting 18 months of negative revision trend. With 2023 EPS back to historical highs, we note Kardex' share price is still lagging 25% behind its peak level despite excellent operating performance.

As Paul Samuelson put it 1982, the equity market has predicted 5 out of 9 recessions. In 2023 things are different and equity markets keep grinding higher, seemingly ignoring the economists chorus with their warning voices. Near term, 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 major economy in a technical recession, although a rather mild one. Switzerland’s inflation has reduced to 1.6% and GDP growth for 2023 is still expected around 1%. More than 50% of companies have reported H1 results and the proportion of those beating expectations is larger than average. The setup is similar to Q1, with lower hurdle rates into the numbers and still good fundamentals. Most sectors are reporting positive EPS growth except real estate, commodity and consumer.