European stocks rebounded strongly in July with the STOXX Europe 600 soaring 7.6%; the best month since November 2020, although this doesn’t tell the full story.
An even larger rebound was observed in many cyclical sectors, which was a significant turnaround from H1 2022. Technology stocks were up 20%, Automotive stocks up 16% and Consumer and Industrials each advanced around 15%.
After a harsh first half of the year, sentiment appears to have changed quickly with treasury traders slashing Fed hike expectations. Fears over hawkish central banks and sky-high inflation, which had undermined markets for months, have at least partly dissipated for now, whilst a relatively reassuring earnings season has provided a further boost.
Markets are rallying in the hope that central banks can prevent a hard landing, brushing off the risk that the slowdown will accelerate and cause further headwinds to corporate fundamentals.
It almost felt like investors’ fear of missing out is back, stoking a rally in equity markets that may appear counterintuitive against a gloomy economic backdrop. That said, as mentioned in our June commentary, the market is already allowing for plenty of negativity, even with the latest rally.
One could even argue that no one is positioned for any good news, and should the clouds troubling investors suddenly clear, upward pressure could arrive with momentum behind it. Cash levels appear to be extremely high in many portfolios, and recession fears stand at pronounced levels similar to precedents set in April 2020 or March 2009. Those precedents have also demonstrated that, if needed, the market is a discounting mechanism and it should bottom out long before a recession is declared.
All that being said, and despite July’s rally, we continue to believe that some caution is warranted for the coming months and we would refrain from aggressively deploying capital for now. Some investors may seem unperturbed by inflation rising above 9% as they expect it to fall to “only” 7% by December.
We, however, are not in that camp as businesses and workers in the real economy will still see prices rising at their fastest rate in decades, which is bound to drive corporate pricing strategies and pay negotiations for 2023.
The Strategic European Silver Stars Fund’s performance for July was +6.86% versus +9.29% for the benchmark. The year-to-date return stands at -11.27%, a 3.80% outperformance compared to the benchmark at -15.07%.
The largest contributors to July’s performance were: Ipsos (+1.26%), Barco (+1.15%) and Bekaert (+1.12%). Byggmax was the largest detractor during the month (-0.12%), followed by LDLC (-0.10%) and Befesa (-0.08%). As shown, the detractors only had a minor impact on performance last month.
On the contrary, on the back of solid H1 reporting, the Fund’s largest positions made a sizeable contribution with stock prices for Ipsos up 12.4%, Barco 26.7% and Bekaert 11.2%.
Despite the uncertain macro environment, Ipsos delivered an excellent H1 2022 print. This trend is expected to continue in H2, leading to a 2022 upward guidance revision (>5% LFL growth; circa 13% EBIT margin). Management doesn’t see any inflexion point, with solid growth in each addressed market/region.
Ipsos’s pricing power is likely to remain strong as two-thirds of contracts are inflation-indexed and EBIT margin improvement should continue to be fuelled by gross margin improvement and productivity gains. Once again, Ipsos is proving both its winning strategy of embracing the industry digitisation trend and the resilience of its business. Although the stock is up over 20% YTD, we believe the potential re-rating is still not over, notably due to an attractive valuation and a compelling combination of structural growth and defensiveness.
On a similar note, Barco’s H1 results were ahead of expectations with revenue growth at 29% YoY and the EBITDA margin at 9.8%, comfortably ahead of its guidance (circa 20% YoY revenue growth and 7.3% EBITDA margin). Barco expects its FY 2022 revenue to grow by approximately 25% with an EBITDA margin of 10-12%.
Compared to before the pandemic, Barco now benefits from: lower competitive pressure in its cinema and control rooms businesses; a more supportive hybrid working environment for ClickShare; and a return to operating room investment that should benefit its surgical activity. Despite this, Barco’s share price remains close to 25% below its pre-pandemic peak.
Bekaert had a solid first half of the year despite subdued demand in China from continued COVID lockdowns. In the Western hemisphere, the elevated demand continues as the local for local approach bears fruit in a world of disrupted supply chains, and the high demand for infrastructure products persists. Consolidated sales came in at €2,859M, up 24% YoY and 4.5% ahead of consensus with all segments showing strong performance.
Despite the uncertain macro-outlook, our thesis is paying out and we acknowledge the impressive track record of Bekaert’s current management team. Significant progress has been made on efficiency improvement and portfolio upgrade efforts, which have resulted in an accelerated FCF generation and significantly strengthened balance sheet, which creates room for M&A and / or share buybacks.
As always, we invite investors and prospective investors, to contact us should they wish to understand our views on the current situation and the positions held in the portfolio. Download the latest factsheet.
Please do not hesitate to contact us or visit the Strategic European Silver Stars Fund Page.
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The views and statements contained herein, including those pertaining to contribution analysis, are those of Pascal Investment Advisers SA in their capacity as Investment Adviser to the Fund as of 09/08/2022 and are based on internal research and modelling. Please click on Disclaimer Page to view full disclaimers.
Morningstar™ Ratings Disclaimer
The Strategic European Silver Stars Fund – A EUR share class has a Morningstar rating of 4 stars overall and 5 stars over 3 Years. Morningstar Rating™ as of 31/05/2022. Past performance may not be a reliable guide to future performance. Returns could be reduced, or losses incurred, due to currency fluctuations. The Strategic European Silver Stars Fund received a Morningstar 3 Globe Sustainability Award. Sustainability Rating as of 30/04/2022. Out of 789 Europe Equity Mid/Small Cap funds as of 30/04/2022. Based on 98.92% of AUM. Historical Sustainability Score as of 31/03/2022. Sustainalytics provides company-level analysis used in the calculation of Morningstar’s Historical Sustainability Score. Data is based on long positions only.