Fund Update : R-co Conviction Equity Value Euro — September 2024

Although equity indices finished the month of August higher, it was nevertheless a very turbulent period, with falls of between -6% and -8% for the US and European indices over the first five days of the month. The publication of a disappointing ISM¹ manufacturing index and a marked slowdown in the US employment market reawakened fears of a recession that investors had finally stopped thinking about. However, reassuring data on the US consumer, the continuing fall in inflation and confirmation from J. Powell that ‘the time had come for monetary policy to adjust’ enabled the European indices to catch up and end the month at their highest level. In the end, the MSCI World gained +0.4%, the S&P 500 +0.2% and the Eurostoxx +1.5%².
 
The return of fears of an economic slowdown favoured defensive sectors (insurance, telecoms) and penalised cyclical sectors (energy, technology, commodities). However, the Value³ and Growth⁴ management styles performed almost equally well in this admittedly volatile market, in which sovereign interest rates changed very little (the Bund was stable over the month and there was a slight fall of 10 basis points in the US 10-year⁵). The performances of the two styles since the start of the year therefore remain very similar (+11.5% for Value and +11.9% for Growth⁵). With PE multiples⁶ of 22.3x for Growth and 9.7x for Value respectively, the valuation premium for the Growth style has nevertheless risen from 127% to 130% over the month⁷, and remains at a historically high level, equivalent to that which prevailed when real rates were still negative, a period which we now believe to be over.
 
Over the month, R-co Conviction Equity Value Euro gained +0.8% and underperformed its benchmark by 74 bps⁸. While our allocation effect was positive, notably through our marked under-exposure to the technology sector, which struggled over the month (down -1.35%⁵), the stock selection effect suffered via our most cyclical holdings (Société Générale -9.0%, Forvia -14.7%). However, our two largest overweights in the portfolio held up well: Sanofi gained +6.1% on the back of its defensive credentials and a quality publication, as did Vonovia (+9.8%)⁵.
 
In terms of movements, we sold two of our positions during the month: 1/ Inditex, a stock in which we had invested in the spring of 2022 when the Iberian company was suffering from the climate of tension in Europe and had seen its margins collapse. At the time, the stock was trading at a PE of 16.5x, far from its high points and historical norms. Since then, the share price has gained almost 140%, and the PE of 24x is no longer compatible with our Value⁵ bias. 2/ CCEP, which had significantly outperformed the market since the start of the year (+21.9%) due to its status as a quality stock, but without any real fundamental justification since its EPS⁹ was revised downwards by -2% over the same period⁵. These disposals were reinvested with a view to maintaining the portfolio's cyclical/defensive balance. We therefore strengthened Pernod Ricard on the back of very low expectations for the stock, ABinBEV on the back of its good results and continued deleveraging¹⁰ , and Airbus and STMicro to take advantage of the risk premiums that could be created by weaknesses in these stocks, whose outlook remains very solid.

Even though the indices continued to rise, the month of August brought back macroeconomic worries that have not entirely dissipated. In fact, some of them have been confirmed by the slowdown in the US economy, although this does not mean that the country is heading for recession. However, the ‘no landing¹¹ ’ scenario now seems utopian, which is logical given the strong cycle of monetary tightening we have just experienced. The question now is whether the cycle of rate cuts that central banks are beginning comes too late to avoid a recession. We do not think so, and continue to favour a scenario of sluggish but positive growth. Nevertheless, this return to reality and rationality should, in our view, also be reflected in the deflation of certain valuation ratios and in the less concentrated performance of the equity market. The Value style, which in our view has already been incorporating a slowdown in the economy for several months, seems to us to be more immune to macroeconomic uncertainties and disappointments than the Growth style. The rebalancing between styles should therefore continue, both as a result of a normalisation of activity and the integration of a new interest-rate paradigm, which still does not seem to have been adopted in terms of management style.