Bellevue Entrepreneur Europe Small (Lux)

European small and mid caps, as measured by the MSCI Europe Small Cap ex-UK, rose by 3.8% in the month (SXXR +4.0%, SPX +3.2%, MXWO +3.2%). While Europe indices managed to outperform, small and mid caps benefited from the market broadening both in the US and in Europe. Inflation data was mixed, with core components showing modest declines both in Europe and the US, maintaining longterm rates relatively elevated. The ECB left key rates unchanged but a June cut is very much in the cards, while the SNB initiated the cutting cycle in Switzerland. Encouragingly, PMIs in Europe confirmed their upward momentum. The Eurozone flash PMI was up for the 5th consecutive month, registering 49.9 in March from 49.2 in February. In term of sectors, energy (+9.4%), real estate (+8.3%) and retail (+7.7%) performed best while personal care, drug and grocery stores (-3.9%), technology (-3.3%) and travel and leisure (-0.9%) lagged the most.

Against this backdrop, the Fund increased 5.0% (EUR / B shares), outperforming its benchmark by 118 bps. This bring the performance to 9.7% over the first quarter of 2024, a 624 bps beat vs. the benchmark.

Top detractors in the month were BESI (-15.1%), Sopra Steria (-5.2%), and Do & Co (-3.8%). BESI was subject to profit taking as the adoption of hybrid bonding in memory may be somewhat postponed. The chip making industry seems to favour TCB in the short term, a cheaper technology but with lower performance notably in term of bandwidth and power. Sopra Steria suffered from negative read across following a poor guidance from Accenture. The slow start of 2024 was already well flagged, but growth should accelerate from Q2 on. Sopra is fully refocussing on European IT services after the disposal of its banking software business and the group will become a real alternative to global providers in Europe. After a strong YTD performance, the international catering specialist Do & Co suffered some profit taking. We continue to like the investment case. The company boasts strong competitive advantages in a consolidating market, which leads to market share gains and profitability improvement.

Top performers in the month were Fuchs (+16.6%), CTT Systems (+15.8%) and Bankinter (+17.4%). Fuchs reported better than expected Q4 results including 3% organic growth, a 240 bps margin improvement and a very strong cash flow generation of EUR 465 mn, well ahead of its guidance. While the 2024 objective was a bit underwhelming, the company confirmed its 2025 EBIT target of EUR 500 mn, leaving ca 5% upside to consensus estimates. The aviation climate control specialist CTT released strong FY23 results with organic revenue growth of 21% and 52% EBIT growth. Thanks to its monopolistic position, the company is in a good position to capitalize on both the recovering aerospace demand as well as the increasing penetration of climate control products for aircrafts. The Spanish Bankinter, in line with banking peers, benefited from a combination of higher longterm rates and positive macroeconomic data. Bankinter is trading on a PE of 7x with a dividend yield of 7% secured by a payout of 50%.        

The European equity opportunity is slowly sinking in. At the same time, European small and mid caps benefit too as the asset class is offering an interesting entry point with valuations below their large caps peers for the first time since 2008. The massive valuation gap with European equities trading at 14x forward earnings, compared to 21x for the S&P 500 speaks for the region. What could be the triggers to a rerating? China seems less bad and we have witnessed some positive macro data. The Caixin China General Manufacturing PMI increased to 51.1 in March, the fifth straight month of growth in factory activity. Copper reached an 11-month high. Also, compared to the Fed, the European Central Bank finds itself in a less complicated situation. The business cycles of the US and Europe have decorrelated a lot in the last 6-12 months and while growth expectations rise in the US, it is the opposite in Germany and a large part of Europe. Finally the March BofA's global fund survey showed the largest increase in allocations to European equities since June 2020. After 3 consecutive years of outflows, it’s time to reconsider European small and mid caps.