BY BERTRAND FAURE
In June, European markets were down heavily (-4.49%). Most of the negative performance occurred in the last 2 days (-3.91%) after the Greek Prime Minister, Mr. Tsipras, caught the troika by surprise by announcing its desire to hold a referendum on 5th July.
Prior to that announcement, volatility in the European markets throughout the month was elevated and driven by numerous rumors about the outcome of the negotiations between the Greek representatives and its creditors. Stock markets in Europe reacted very negatively to the referendum announcement. To the contrary, foreign exchange currencies and sovereign bonds spreads in Europe were less impacted anticipating that the contagion risk remains limited and manageable even if Greece were to default on its future debt repayment obligations.
In that context, the Fund outperformed its benchmark by 1.41% benefiting from the Fund’s cash position and the lack of exposure to financials. At the stock level, the biggest contributors to performance during the month were GfK, Aubay and Beneteau while the most important detractors were Tarkett, Albioma and Mersen. June enabled the Fund to recoup entirely the underperformance versus the index inherited from the results of the UK elections the day after the launch. The Fund’s investments share common features: experienced management teams, sound balance sheets, and strong free cash flow generations. On top of that, the persistent weakness of the Euro will provide most of those companies with a significant boost for the top line and margin developments in 2015.
Recent volatility in European stock markets caused by the referendum announcement will undoubtedly create opportunities for the Strategic European Smaller Companies Fund in the coming months. Greece represents 3.3% of the Eurozone population and 1.8% of the Eurozone GDP. As such, whatever the result of the referendum and the issue of the negotiations with the creditors shall be, its influence remains limited. The risk of contagion in other European peripheral economies has substantially diminished since 2011 with the ECB backstop in place as evidenced by tne response of government bonds spreads. The Fund holds no investment in financial companies and its investments have no exposure to the Greek economy. The Investment Adviser’s belief is that clarity should emerge reasonably quickly and the main attraction of European stock markets remains valid: strengthening of the US$ versus the €, consumer confidence improving thanks to the decline in energy prices, BCE’s accommodative policy. In the meantime, the portfolio management team will do their best to exploit market volatility and reinforce the Fund’s investments at more attractive levels.
The views and statements contained herein are those of Pascal Investment Advisers SA in their capacity as Investment Adviser to the Fund as of 02/07/15 and are based on internal research and modelling.