Bellevue Sustainable Entrepreneur Europe (Lux)

European equities, as measured by the SXXR, rose 1.9% in February, against receding US and global markets (SPX -2.5%, MXWO -2.4%, both in USD). Strong economic data reignited fears of tighter monetary policies for longer and ultimately recession angst. Longterm rates resumed their upward trend, with the German Bund back to 2.65% and treasuries up 41 bps to 3.92%. The labour market remains tight with unemployment rates at decades lows both in Europe and the US. The flash Eurozone PMI Composite Index rose for a fourth successive month, climbing to 52.3 from 50.3 in January. The improvement was led by services (53.0 from 50.8), while manufacturers returned to expansion mode for the first time since last May. Inflation in the Eurozone slowed only marginally to 8.5% and core inflation actually increased to a new record high of 5.6%. Against this backdrop, the Fed and the ECB raised interest rates by 50 basis points at their meetings in early February and confirmed further hikes. In term of sector performances, banks (+6.2%), automobile and parts (+6.2%) and energy (+5.2%) performed best while basic resources (-6.6%), real estate (-2.1%) and technology
(-0.7%) lagged the most.

Against this backdrop, the fund increased 2.4%, 9.2% ytd (EUR / B shares), outperforming its benchmark by 52 bps (49 bps ytd).

Main detractors in the month were Synlab (-16.6%), Merck (-6.1%) and Kering (-7.3%). Synlab surprisingly cut its 2023 guidance, which was only provided at 3Q. This clearly suggests to us not only a deterioration of near-term fundamentals and industry pricing pressure, but even more importantly a complete lack of visibility on the management side. We have decided to exit the position. Merck reported soft Q4 earnings with the divisions electronics and life science decelerating in the context of softer markets. 2023 guidance was also light, as COVID-related sales decelerate. The French luxury good company Kering presented weaker-than-expected FY22 results and heavier operating deleverage, mainly due to the Chinese lockdowns during Q4. The conference call was however very supportive on both Gucci’s growth and China reopening. We stick to our revaluation case in light of the big discount to LVMH.

Top 3 contributors in the month were Sopra Steria (+22.8%), Publicis (+16.2%) and Subsea 7 (+8.0%). Sopra Steria, the French IT Services company, delivered strong EPS growth of 32%, driven by both organic growth and operating margin at the upper end of expectations. For 2023 the company is guiding for a topline growth of at least 3%, while margins should also continue to improve on the back of a better monetization of the offering. This should pave the way for a valuation rerating. In the same vein, the advertising agency Publicis delivered stronger than expected 2022 organic growth of 10.1%, driven by data and digital transformation, two growth drivers likely to boost growth above 3% in 2023. Subsea 7 continued to benefit from a favourable environment with increasing activity in both traditional O&G and renewable end-markets. Pricing power has returned to the subsea sector on the back of tightening equipment and services capacity. The company reported above expectation Q4 results in terms of EBITDA, cashflow and order intake.

Europe continues to outperform being much more geared to rising interest rates and China reopening versus the US. Also, the valuation discount had hit a new high in the aftermath of the Ukraine war and the expectation of a deep energy crisis. Between July and September, European natural gas prices made new all-time highs in the preparation of a potentially cold winter combined with supply shortages. Six months on, the picture has dramatically changed with European gas prices down by 85% on the back of warmer weather and lower consumption. With this, gas stocks remain high and the January stockpile is at the top end of the seasonal range of the past 10 years. This means Europe can reach full capacity again during the summer 2023, the risk of another gas price spike is low and the next winter can come.