Bellevue Entrepreneur Europe Small

European small and mid caps, as measured by the MSCI Europe Small Cap ex-UK, were unchanged (+0.1%) in December slightly outperforming the broader index (SXXR -0.5%, SPX -2.5%) and closing the year +2.8% (SXXR +8.8%). Both European and US central banks cut interest rates as expected by 25 bps, but the more hawkish tone triggered a sell-off across asset classes. US longterm rates rebounded sharply, pulling European rates in their wake. In France, the government under M. Barnier collapsed, widening bond spreads to levels last seen in 2012. Eurozone inflation rose to 2.2% year-on-year, up from 2% in the previous month, but the core inflation remained at 2.7%, marking a five-month low. The Eurozone’s flash PMI for December came in at 49.5, up from 48.3, with services returning to expansionary territory (51.4 vs. 49.5), while manufacturing remained weak (45.2). In terms of sector performance, consumer discretionary (+3.6%), financials (+2.1%) and information technology (+1.4%) led the gains while real estate (-4.6%), consumer staples (-4.3%) and utilities (-4.3%) lagged the most.

Against this backdrop, the fund declined 1.0% (EUR / B shares), underperforming its benchmark by 79 bps. This brings the annual 2024 performance to 3.1%, 33 bps above benchmark.

Top detractors in the month were Carl Zeiss (-19.3%), Buzzi (-11.3%), and Nordex (-5.5%). Carl Zeiss reported Q4 FY24 revenues short of consensus by ca. 3%, however adj. EBIT delivered a 13% beat, reaching the midpoint of FY guidance. Revenue was flat (including DORC) with persistent weak demand for both ophthalmology and neurosurgery. Management guided for moderate (LSD) growth in FY25 as macro uncertainties persist, EBITA margin is expected to remain stable or slightly up. EPS 25E have been revised down by ca. 14%, the question being if they are now fully derisked. The share trades at 12M fwd PE of 19.6x versus LT avg of 27.5 and a median of 22.6x. Beyond recent US interest rate spike, Buzzi suffered for technical reasons after joining the main Italian index FTSE MIB, exiting the mid cap index after a very successful performance. While this will enhance liquidity and visibility for Buzzi, it temporarily caused selling pressure due to the reduced weighting. Buzzi’s strong position in the US will benefit the company in 2025 and we remain positive on the stock. Nordex has been affected by the broader negative sentiment in the renewable sector, which has persisted since Donald Trump’s election. Nordex is focused on onshore wind with a strong market share in Germany and has no exposure (yet) to the US.

Top performers in the month were Do&Co (+12.5%), Metso (+7.9%) and Unicaja (+9.7%). After two years of very strong growth fuelled by the ramp-up of major contracts with BA and Iberia, Do&Co’s growth should stabilize at a DD level, led by passengers traffic growth and contract wins, in both the airline and international event division. The recent margin improvement demonstrates that fast growth does not come at the expense of profitability, thanks to Do&Co’s strong execution and premium positioning. Metso has become more positive on the copper mining outlook and has registered a good level of orders during Q3 after a long wait. Thanks to its mobile crushing equipment, Metso would also stand to benefit from an end to the Ukraine war. Our recent meeting with the management confirmed our positive stance. Unicaja finished the year up 43% (TR 57%). The Spanish domestic bank announced the introduction of an interim dividend payment as well as a higher payout ratio above 50%. With a strong local economy, RoTE raising above 10% from 2024, CET1 >15% and a 15% yield from dividends and SBB, Unicaja remains attractive.

The European equity opportunity is slowly sinking in. At the same time, European small and mid caps benefit too as the asset class is offering an interesting entry point with valuations below their large caps peers for the first time since 2008. The massive valuation gap with European equities trading at 14x forward earnings, compared to 21x for the S&P 500 speaks for the region. What could be the triggers to a rerating? China seems less bad and we have witnessed some positive macro data. The Caixin China General Manufacturing PMI increased to 51.1 in March, the fifth straight month of growth in factory activity. Copper reached an 11-month high. Also, compared to the Fed, the European Central Bank finds itself in a less complicated situation. The business cycles of the US and Europe have decorrelated a lot in the last 6-12 months and while growth expectations rise in the US, it is the opposite in Germany and a large part of Europe. Finally the March BofA's global fund survey showed the largest increase in allocations to European equities since June 2020. After 3 consecutive years of outflows, it’s time to reconsider European small and mid caps.