The FED and ECB Remain Flexible

The Fund gained +5.31% during January. Much has been said about the relief during January as markets showed signs of being more rational following the dislocation and volatility that characterised the last quarter of 2018. The market has been remarkably resilient, with investors brushing aside bad news and buying on weakness. From a top down perspective, the recent dovish statements by the Fed and the ECB clearly illustrate their willingness to remain flexible. According to the Investment Adviser, this pause in monetary policy tightening should support global markets for the months to come.

Monthly Fund Commentary
11 Feb 2019

The Fund gained +5.31% during January. Much has been said about the relief during January as markets showed signs of being more rational following the dislocation and volatility that characterised the last quarter of 2018. The market has been remarkably resilient, with investors brushing aside bad news and buying on weakness. From a top down perspective, the recent dovish statements by the Fed and the ECB clearly illustrate their willingness to remain flexible. According to the Investment Adviser, this pause in monetary policy tightening should support global markets for the months to come.

The latest reporting season has gone well for the Fund’s positions; with more than half of the portfolio’s constituents having published results this year, pointing to continued growth in sales and margin expansions and the general absence of a recession in their business for 2019. Also noticeable from a bottom up perspective is the vast majority of companies in the Fund’s universe which have reported profit warnings for 2019 since the beginning of the year and which were in fact up on the day of the announcement, showing how oversold the market had become in the last days of 2018.

Spie was the largest monthly performance contributor for the Fund, followed by Mersen and Boozt. Takeaway.com, Elis and Akwel were the three largest detractors. After a very disappointing 2018, Spie had a strong month, gaining +13.6% and being up +21.7% (as at 31/01/2019) since its low point on the 20th December. At a conference in Lyon in early January, the Company confirmed its 2018 guidance, notably with regards to Free Cash Flow generation (translating into a 13% yield), which was one of the main reasons behind investors’ skepticism around the Company in 2018.

Mersen released its 2018 revenues during the month. After strong performance during the first 9 months of the year (+10.6% organic), Mersen once again beat expectations in Q4 18 on an even tougher comparison base (+13% organic in Q4 17). Management remains confident in the group’s ability to continue delivering positive growth and expanding margins in 2019.
Finally, Boozt surprised very positively on the 24th January when it pre-released its FY 18 results. EBIT was 40% ahead of guidance thanks to an unexpectedly strong December driven by Boozt’s locally relevant inventory and strong delivery proposition that led to better-than-expected revenue growth and gross margin in Q4. In the release, the CEO was quoted as saying: “With all key performance indicators looking healthy, we enter 2019 in a better shape than ever.”

On the detractors’ side, there is very little to be reported with no news and a limited performance impact. The three largest detractors accounted for a combined negative contribution of 38 basis points.

The Fund ended the month with a fairly large exposure to the French market (42%). This is a deliberate decision derived from the valuation dichotomy observed by the Investment Adviser across Europe, especially in the Small & Mid cap space, with Morgan Stanley strategists noting; “France is the most oversold market in Europe at a small and mid-level and average relative valuations have rarely been cheaper in the last 25 years”.

The views and statements contained herein are those of Pascal Investment Advisers SA in their capacity as Investment Adviser to the Fund as of 11/02/19 and are based on internal research and modelling.