European markets fell sharply in June, with the MSCI down 7.7% The first half of the month was dominated by the same themes that have prevailed since the beginning of the year: inflation (accelerating in May) and monetary tightening (75bps rate hike by the Fed and the start of normalisation in Europe). The consequence was a further rise in the long-term rates and the compression of multiples associated with quality stocks.
In the second half of the month, investor attention shifted to the consequences of monetary tightening on business activity, with European and US PMIs coming in below expectations. Long-term yields retraced some of their early month rise, defensive stocks regained ground, and cyclical stocks were heavily sold-off.
The Strategic Europe Quality Fund was negatively impacted on its positions exposed to construction markets: Saint-Gobain, Kingspan, Schneider, Nexans and Legrand fell sharply. We exited Legrand during the month.
While the coming quarter should be good, we fear that the residential cycle has peaked, making the outlook for 2023 more uncertain for a valuation that is insufficiently defensive.
We are maintaining our positions on other stocks whose multiples already seem to factor in a large slowdown (Saint-Gobain’s P/E 2022 stands at 7X). The good positioning of these companies in terms of the energy transition theme provides a modest cycle buffer but, above all, a very lowly-valued medium-term growth tailwind.
Among quality stocks, we took advantage of the month’s volatility to position ourselves on two companies that have de-rated strongly since the beginning of the year: Wolters Kluwer and Dassault Systemes.
Wolters Kluwer has a very defensive business model and good prospects for accelerated growth, with more than 50% of sales now based on cloud and software offerings.
Dassault Systemes, the world leader in 3D software, is expected to benefit from the expansion of its addressable markets to new verticals (the latest one being life sciences) and from the accelerated adoption of its 3DX platform. These purchases were partially financed by the trimming of our Edenred position after a very good absolute and relative performance.
The first half of the year has been difficult for equity markets, amid high inflation and rising interest rates, providing a tough backdrop for the Fund, given our positioning towards quality stocks. Whilst we remain mindful of an upcoming economic slowdown and stubbornly high inflation levels, we maintain our focus on investing in highly attractive business models at reasonable prices.
As always, we invite investors and prospective investors, to get in touch should you wish to discuss the positions held in the portfolio. Please do not hesitate to contact us for further information.
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The views and statements contained herein are those of Phileas Asset Management in their capacity as Investment Adviser to the Fund as of 08/07/2022 and are based on internal research and modelling. Please click on Disclaimer Page to view full disclaimers.