Bellevue Entrepreneur Switzerland (CH)

Swiss equities, as measured by the SPI, dropped 5.7% in September. Equity markets around the globe experienced a strong profit taking (SXXR -3.3% in EUR, S&P500 -4.8% in USD), driven by the risk of contagion from the potential default of the Chinese real estate giant Evergrande as well as inflation risks and a more hawkish Fed. Interest rates rose quickly and oil prices hit a new high at USD 79 pba (+8% in the month). Macro figures were uninspiring on the back of supply chain tightness, with the EU composite PMI index in September falling 3 points on the previous month (to 56.1 points vs. 58.5 expected), the lowest in 5 months, whereas the US PMI dropped by 0.9 points to 54.5. Against this backdrop, cyclicals and value outperformed defensives/growth, which typically have longer duration and higher negative sensitivity to LT rates. Communication services (+0.9%), consumer discretionary (-1.8%) and consumer staples (-2.8%) performed best, while technology (-10.3%), materials (-10%) and healthcare (-7.1%) lagged the most.

Against this backdrop, the fund lost 4.5% (CHF / A shares) in September, outperforming its benchmark by 125 bps. This now brings ytd return to 20.3%, i.e. an outperformance of 660 bps vs the SPI.

Top 3 contributors in the month were Flughafen Zurich (+9.7%), Aryzta (+9.6%) and Burckhardt Compression (+4.3%). Flughafen Zürich, like most travel and leisure stocks, traded firmer. Short-term air traffic volumes indications have been positive and we expect this trend to continue until year end in to the autumn school holidays and the Christmas season. Starting November, airlines will have to operate at least 50% of their 2019 capacity, in order not to lose airport slots. Also, higher vaccine rates and Merck’s new COVID treatment announcement help the sector. Aryzta also benefited from the improved COVID environment, leading to the anticipation of a more positive Q4 trading (July). Burckhardt Compression benefited from the good performance of all energy-related stocks due to rising oil prices and the sector rotation in favor of value stocks. In addition broker reports highlighting the good growth prospects of the hydrogen market helped the sentiment on the name.

Main detractors in the month were Huber & Suhner (-11.9%), Logitech (-11.1%) and Sika (-10.1%). Huber & Suhner suffered from the placement of 10% stake of its long time shareholder Metrohm. We continue to like the investment case, based on the company’s potential into 5G and electro-mobility and it’s attractive valuation in the Swiss industrial space. Logitech was weak along the IT space (-10% in Europe) in the sector rotation away from growth. The company is expected to report its Q2-21/22 figures on October 25. The current share price, implying an EV/EBITDA for the current fiscal year of ca 15x, puts the stock nearly in value territory when considering the group’s mid-term growth profile. Sika, the super well-managed leading construction chemicals company with intact M&A track record, asset light, diversified by customers and end markets and strong ESG credentials also fell victim of the rotation.

PMIs are weakening and inflation is rising both driven by demand/supply unbalances and supply chain disruptions. Society has been more or less switched off during 18 months and the system needs to adjust to a new level of demand. JIT supply chains are not build to cope with this kick-start. Spot inflation will normalize over time, although the absolute level should be above pre-pandemia. We do not adhere to a stagflation scenario and expect growth to return driven by large pent-up demand as COVID-19 recedes and output is debottlenecked. We have initiated a new position in Medmix, a spin-off from Sulzer. We see Medmix as an interesting niche provider of high-precision delivery devices/applicators for the healthcare, beauty and industrial markets, with solid growth potential.