October was worst month YTD for eurozone small caps (–4.80% for our benchmark index). We noted seven trading days (out of 22) with daily changes greater than –1%, compared to five (out of 23) in March at the height of the banking crisis – a sure sign of investor tension. The asset class’s cash outflow, seemingly uninterrupted since 2018, continues to dry up liquidity and increase volatility, to the point of causing several IPOs to be cancelled at the last minute in October. There is a clear lack of incremental buyers. We also note that shares which underperform are punished more than in the past, while positive reactions are considerably more restrained.

Consumer goods, industry and materials have all slowed since publication of a disappointing eurozone purchasing managers’ index (PMI). Health care has utterly failed to fulfil its role as a defensive sector, mainly because biotech lacks financing and visibility. The property and energy sectors both outperformed the index. A slowdown in the rise of long-term yields boosted real estate, while fears of a wider conflict in the Middle East helped energy.

Earnings announcements in October were good on the whole, with the exception of BARCO (profit warning because of China’s weaker-than-expected recovery) and SES-IMAGOTAG (slight disappointment in Q3 growth because of seasonal earnings now shifted to Q4). SOPRA STERIA was in line, though investors are concerned about 2024. We are contrarians in this instance and believe that the group will outperform the sector. This view is attributable mainly to the group’s defensive status and long-term contracts. NEMETSCHEK, GTT and VIRBAC have raised their outlooks for 2023.

Last month we sold our positions in OVH and ZALANDO ahead of their earnings announcements.

OVH is too dependent on a clientele of SMEs which lack financing and are subject to high energy prices. ZALANDO has been hit by the decline of purchasing power across Europe.

We also decided to sell our position in TECHNIP ENERGIES after it was revealed that the group may have violated European sanctions during a project in Russia. This allowed us to open positions in ELIS and BESI.

ELIS is the European leader in workwear rental and maintenance, with market share of between 40% and 50% in certain zones. ELIS has impressively demonstrated its capacity to raise prices in an inflationary environment. The group’s markets are highly recurrent, and it enjoys significant barriers to entry. Strong cash flow should quickly make the group eligible for investment grade rating consideration, and help it to continue sector consolidation.