After rising more than 18% year to date, energy and commodities are the leading sectors in the European market, far ahead of telecoms, health care and insurance. All the other sectors are in negative territory. Though it is evident that a fund managed according to PRICING POWER and labelled SRI has not been able to compete YTD, it is important to remember that 2022 is far from over.
What is happening is that we are coming face to face with ourselves: do we choose responsible finance or . . . irresponsible finance? Warren Buffet has chosen his camp, no doubt about it. Taking a page straight out of Rockefeller and the nineteenth century, he has invested $24 billion in oil companies over a period of a few weeks. Holding such companies is one thing, but we believe that actually adding to such positions during a war in Europe raises questions. Well, to each his own.
Fully 53% of our companies have published Q1 results, and 100% of those are as good as or better than the consensus. Nonetheless, the fund is well behind its benchmark index for the reasons discussed above.
It is instructive to compare the earnings of our companies with their stock market performance. The past year is particularly edifying. Take AIRBUS, whose estimated EPS rose 33%, compared with 13% for its shares. Or BMW (+47% vs. –4%), DR. MARTENS (+6% vs. –45%) and INFINEON (+32% vs. –14%).
Ours is not a growth fund, however. Out of 30 of our shares, 11 have a P/E 2023 of less than 14, 6 have a P/E of around 15, and the rest have a P/E/ greater than 15. Yet the market is not interested in MERCEDES or BMW despite their P/E 2023 of 6.2 and 5.2, respectively, nor PIRELLI (7.5), SMURFIT KAPPA (10.8), KION (9.8) or DE’LONGHI (11.6).
The market does not distinguish by valuation, but rather according to sector or sub-sector. The old clichés still apply (“technology is cyclical”), never mind that INFINEON has an order book stretching out for two years!
Of the 50 greatest losses YTD in the STOXX Europe 600 NR index, the fiftieth is still at –37%.
The fund is very well positioned for a market rebound, as we are neither pure growth (with its tricky valuation issues related to duration) nor pure cyclical (with its inevitable problems once the economy slows). In fact, our portfolio is more on the “growth at a reasonable price” (GARP) side, or in any case a collection of autonomous growth stocks.
For the time being the market is behaving like it did in the twentieth century, with telecoms, large retailers and insurers outperfoming. For markets to stabilize then recover, we will need central banks to normalize their policies and the war in Ukraine to end.
The fund’s ESG rating is up slightly (after the annual update of our GEST base), and there was no movement in the fund. In terms of market caps and geographical distribution, there was little change.