Bellevue Entrepreneur Europe Small

European small and mid caps, as measured by the MSCI Europe Small Cap ex-UK, were flat (+0.1%) in November underperforming the broader markets (SXXR +1.1%). The US election was the main event with the victory of D. Trump and the Republican in control of the two chambers. US equities bounced back, with US small caps (+10.2%) outperforming large caps (S&P +5.3%). The EUR/USD fell temporarily to its lowest level since 2022. The French market was weak, with political instability leading to the resignation of the prime minister. The global economic narrative remained generally positive, with the US confirming its strength, underpinned by good consumer confidence. In Europe, the Flash PMI for the Euro Area sequentially deteriorated to 48.1 vs 50 in October with both services and manufacturing now in contraction territory. In terms of sector performance, financials (+4.2%), energy (+2.6%) and real estate (+1.6%) performed best while communication services (-3.0%), information technology (-1.8%) and consumer discretionary (-1.4%) lagged the most.

Against this backdrop, the fund declined 0.8% (EUR / B shares), underperforming its benchmark by 86 bps. This brings the ytd performance to 3.9%, a 116 bps beat vs the benchmark.

Top performers in the month were Swissquote (+18.5%), Buzzi (+11.5%) and Do & Co (+12.2%). Swissquote has built a successful one-stop-shop for retail investors to trade almost any asset. It was the first Swiss bank to introduce crypto in 2017 and the asset class grew to account for 22% of trading income in the boom year of 2021 versus 11% in H1 2024. The Trump election win has propelled crypto to new highs and Swissquote will benefit. With more than 50% of its EBITDA in the US, the cement producer Buzzi was also a beneficiary of the Trump election. Q3 sales release showed a slight sequential improvement in volumes and continuous robust pricing. The 2024 guidance was reaffirmed, supported by favourable geographical mix. Buzzi is trading on a very attractive cash adjusted P/E of 6.5x. Do & Co reported another strong quarter, delivering 21% sales growth, driven by airline catering (+24%) and international events (+16%). Profitability improved up 150 bps qoq. This trend should continue in H2, suggesting upside potential to consensus.

Top detractors in the month were Rovi (-17.5%), Nexans (-8.8%) and CAF (-15.7%).  As a main contract manufacturer for Moderna (-21% in the Nov), Rovi suffered from the insecurities following Kennedy Jr.’s nomination at the head of the US department of Health. For Rovi, the future is all about CDMO and we expect a flurry of new contracts in the area of obesity to be announced in 2025. Nexans suffered from its albeit small exposure to US offshore wind. With only 8% of its total backlog in the US and most of it being attached to projects currently executed, we deem the “Trump” risk to be very limited. Nexans held a CMD with new 2028 objectives implying an annual 10% EBITDA growth rate, underpinned by the execution of its multi-billion dollar backlog in high voltage and its up-market strategy in medium voltage. The Spanish rolling stock and e-bus manufacturer CAF was severely impacted by the floods in Europe. Customers could not take delivery of their orders and finished busses stayed in the depot. The situation was reversed in October but with poor communication the stock plunged despite unchanged FY guidance.

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.