Political situation in Italy keeps market in suspense

BY BERTRAND FAURE

Monthly Fund Commentary
25 Jun 2018

BY BERTRAND FAURE

During May the Fund reported a loss of -1.91% in absolute terms. Despite the uncertainty in Europe, in part created by the political situation in Italy and the resurgence of protectionism, European financial markets managed to navigate the risks with the Fund’s benchmark gaining 0.13% in May.

In terms of performance attribution, Ferronordic Machines was the largest monthly contributor, followed by Lisi and Norma. The position in Ferronordic Machines, a Swedish industrial company, had been initiated in January this year. It is the exclusive distributor for Volvo’s construction equipment in Russia, where it has a well-established dealership network, and is benefitting from the rebounding construction equipment segment. The Company intends to triple revenue between 2016 and 2021, showing confidence in its abilities and a market recovery. From a business perspective, Ferronordic is adding new products and brands and is expanding into new regions that offer additional growth opportunities. According to the Investment Adviser, it remains a fairly undiscovered Company with only one local broker covering the stock. More visibility in the months to come is likely to improve interest and valuation multiples.

Lisi rebounded post Q1 results and returned to its pre-results level. Finally, Norma raised its revenue guidance for the year on the 7th May, from 3-5% to 5-8% sales growth, based on the group’s January-April 2018 sales as well as the expected group sales until year end.

At the other end of the spectrum, Spie, VA-Q-Tec and Jacquet Metal were the three main detractors. During the month, Spie suffered from two broker downgrades (HSBC and Jefferies) on the basis of short term and highly debatable arguments. The Investment Adviser considers the resulting volatility as a trading opportunity given that the positive momentum seen in Q1 2018 continues and the investment thesis (based on a strong free cash flow generation profile) remains absolutely unchanged. VA-Q-Tec was penalised by a soft Q1 in terms of revenue growth and needs to demonstrate its ability to recover during the year. Finally, post a strong run in April, Société Générale decided to downgrade its recommendation from “Buy” to “Hold” on the 7th May. Given today’s importance of algorithm trading, even in the team’s less liquid universe, changing broker recommendations (often regardless of the significance of the broker), can have a visible impact on the short term price evolution. Impacts often remain short term and momentum driven and do not reflect the company’s fundamentals.

In late May and early June the Investment Adviser exited all positions with direct exposure to Italian consumers or the internal economy. Even if the country finally has a government, the announced measures can only be negative from a GDP perspective and – according to the Investment Adviser – are likely to weigh on consumer confidence and consumption. Consequentially, OVS and Unieuro were divested throughout the month, with Brembo remaining the only Italian position. The Company’s 10% exposure to the Italian market stems from its relationships with Ferrari, Maserati and other companies, which are less impacted by internal economic dynamics.

The views and statements contained herein are those of Pascal Investment Advisers SA in their capacity as Investment Adviser to the Fund as of 13/06/18 and are based on internal research and modelling.

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