In June and following May’s sell-off, European equity markets rebounded, predominantly on the back of changes in monetary policy expectations. The Fed’s FOMC meeting guided towards a possible rate cut in July, whilst the ECB guided the market towards monetary policy easing over the coming months.
More generally and across the globe, central bank communication contains a more dovish bias. The perception of greater central bank activism provided a degree of confidence to the market after a sustained period of deterioration in macro data triggered by trade war-related uncertainties.
The Fund posted a strong +4.76% in June, resulting in a year to date return at the end of the first half of +17.47%.
The main contributors to the first half performance were Barco (+2.79%), Spie (+2.65%) and Albioma (+1.85%). The Investment Adviser feels that Barco is getting closer to its fair value, so that exposure to the stock was trimmed on the way up. Spie and Albioma however are deemed to have a long way to go, so the position sizes were allowed to grow as the stocks performed through the course of H1.
During June, Albioma was the largest monthly performance contributor, followed by Gränges and Mersen. Albioma, the Fund’s largest position, traded at €23.30 at the end of June, translating into a 48% gain from its low point at €15.70 on the 11th December 2018, with the Company having paid a €0.65 dividend during the period. Towards the end of the month, a sell side broker upgraded its recommendation on the stock with a €29 target price, a level the Investment Adviser still considers to be substantially below the Company’s intrinsic value. The November 2018 newsletter covered this position in detail, particularly the issue of the market not fully recognising the Company’s value from news flow.
During the month, Gränges and Mersen benefited from the general market rally of cyclicals and industrials names.
There was little impact in terms of detractors during the month, with only five positions posting nominal negative returns. Ipsos was the largest monthly detractor, followed by Boozt and Metall Zug.
The Investment Adviser was surprised by Ipsos’ evolution during the month. According to the Financial Times**, Bain Capital has entered into exclusive talks to acquire a majority stake in Kantar, WPP’s market research subsidiary and one of Ipsos’ direct competitors. WPP has been looking to sell a majority stake in Kantar for several months in an attempt to reduce its leverage, with the stake being valued between 3 and 3.5bn GBP and the indicated transaction price translating into a 10-12x EV/EBIT. Ipsos currently trades below 8x for the current fiscal year, while consistently outperforming Kantar in terms of organic growth over the past years.
As discussed in last month’s commentary, the cyclical share of the portfolio was reduced during the month, to further concentrate on investments more resilient and less sensitive to short term GDP fluctuations through the Q2 reporting period.
The views and statements contained herein are those of Pascal Investment Advisers SA in their capacity as Investment Adviser to the Fund as of 11/07/2019 and are based on internal research and modelling.