Will history repeat?

In September, the Strategic Europe Quality Fund outperformed the MSCI Europe by 1.26%. Sector allocation was neutral (-2bps), while the stock selection was positive (96 bps).

Since the beginning of H2, the market’s focus has pivoted towards the recessionary impact of high inflation and monetary tightening. This has been reflected in a largely inverted yield curve in the US since early July. Leading indicators, such as the new orders component of the US ISM falling below the 50 level, vindicates that view.

It is interesting to note that for the past seventy years, every period of inflation above 5% has, without exception, ended in a recession. In this context, exposure to highly cyclical companies and / or leveraged balance sheets is fraught with risk. We deem that our portfolio structure, largely overweight on quality companies with healthy balance sheets, is appropriate.

The consumer segment remains pressured by falling real incomes, excess inventory and a rising dollar. We sold our remaining position in Nike on the back of a mixed release. Sales are set to remain strong, but the unusually high level of apparel inventory in the US does not reflect well on the company’s supply chain management capabilities and will weigh on gross margins in the coming quarters.

Whilst most fragile consumers are quickly cutting back on discretionary expenditure, the more affluent consumer seems to continue spending. We find value in our luxury and spirits holdings, yet remain wary of potential upcoming negative wealth effects on demand.

On the other hand, stocks exposed to the energy transition theme have performed well. Companies such as Schneider or Nexans are just starting to benefit from the megatrend of energy infrastructure electrification. We believe that this investment cycle will last at least ten years and should warrant a higher multiple.

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.

Adam Turberville
Director
+44 1481 742380
a.turberville@ericsturdza.com

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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 07/10/2022 and are based on internal research and modelling. Please click on Disclaimer Page to view full disclaimers.