Bellevue Entrepreneur Europe Small (Lux)

European small and mid caps, as measured by the MSCI Europe Small Cap ex-UK, reverted trend rising 9.2% in July underpinned by the increasing perception that the Fed hawkishness may have reached its peak while economic momentum is weakening. Acknowledging the very high inflation, the ECB finally decided to hike rates by a larger than expected 50 bps first move. It also announced the new Transmission Protection Instrument, an unlimited tool in size designed to control peripheral spreads. The US Fed raised rates by 75 bps in line with expectations but adopted a more cautious tone regarding future increases above the neutral level. US treasuries fell back below 2.7% while the German Bund yield nearly halved in the month to 0.8%. The flash EZ Composite PMI declined to 49.4 (June 52.0) as an accelerating downturn in manufacturing output (46.1 vs 49.3 in June) was accompanied by a near-stalling of services (50.6 vs 53). Nordstream 1 restarted but gas flow remains low compared to historical levels and highly dependent on the unpredictable geopolitical situation. In term of sector, industrials (+13.3%), information technology (12.2%) and real estate (+11.5%) performed best while financials (+2.0%), communication services (+3.2%) and consumer staples (+5.3%) lagged the most.

Against this backdrop, the fund increased 5.7% (EUR / B shares), a 346 bps under-performance versus its benchmark.

Main detractors in the month were Bankinter (-19.3%), Polypeptide (-39.5%) and Arjo (-11.3%). After a very strong ytd share price performance, the Spanish Bankinter suffered from the unexpected decision by the Spanish government to impose an exceptional tax on “excess” earnings generated by banks, considered beneficiaries of the higher interest rates. While negative, the impact has been estimated at a low percentage of the sector market cap given the temporary nature of the tax, and the share price reaction looks overdone to us. Polypeptide hugely disappointed. While H1 sales are set to remain roughly at prior-year level, EBITDA margin falls from 32% to 20% due to higher input costs, implying a 30 to 40% reduction in consensus expectations. Given limited visibility on future sales growth and margin progression as well as high valuation, we have chosen to realize the losses and exit the position. Arjo, the Swedish manufacturer of medical equipment, released disappointing Q2 results missing estimates as profitability was held back by weak organic growth as well as higher materials and logistic costs. Healthy order intake in profitable areas such as patient handling and DVT suggest a better H2.

Top performers in the month were U-Blox (+19.9%), Alten (+26.8%) and Nexans (+26.6%). U-Blox, the Swiss specialist of IoT chips and modules, was top 3 for a 3rd month in a row after having raised 2022 guidance in May. Still trading 50% below its 2018 peak, we continue to see significant potential upside to its share price. Growth momentum seems firmly underpinned by positive IoT trends in both the industrial and auto segments – as recently highlighted by Qualcomm – as well as trending own design wins. Alten, the French leading R&D outsourcing group, released Q2 revenues above expectations marked by very strong organic growth of 19%, with demand remaining strong across its well diversified end markets. No sign of slow-down has been noticed which led Alten management to commit for H2 growth well above 10%. Nexans, the French cable manufacturer, delivered strong H1 results marked notably by an EBITDA up 39% yoy and 18% above consensus expectations driven mainly by the usages (building) segment which benefited from very good pricing and solid volumes. Along cyclical momentum, the company also experiences strong structural growth as seen in its electrification business.

The hefty interest rate movements prompted the great return of growth versus value and underline the importance of a diversified portfolio. After this swift rebound it is difficult to feel confident about further market strength but sector and style rotations may continue. We exited the rest of our Ceconomy position after the profit warning. Taking advantage of the cheap valuation we increased positions in Swissquote and Cargotec after the good results. We also bought into BE Semiconductor and Majorel.