Anthony Bailly
Head of European Equity
The promising AI theme was not enough to keep the Eurostoxx index in positive territory. The Eurostoxx reinvested dividends fell by 2.5% over the month, despite the very good performance of the technology segment, which rose by 7.6%, driven by the semiconductors(1) segment. This enabled the growth style to outperform over the month, with a decline limited to 0.4%, while the value style was down 4%. This brings the performance gap in favour of the growth style since the start of the year to 11.4%. This gap is essentially explained by the feeling that we are nearing the end of the rate hike period (reinforced by the FED's expected pause after the June meeting), but also by the fears weighing on the economic cycle and impacting on cyclical sectors, commodities and financial stocks.
This is reflected in the valuation of the value style in Europe, which is once again close to its historic lows at 8.6x P/E, compared with 12.6x for the MSCi Europe (close to its historic median) and 20.8 for the growth style, close to its highs. This strong dichotomy is mirrored at sector level, with value sectors showing P/E valuations back at historic lows. This is the case for autos (6.1x), banks (6.8x), energy (7.2x) and commodities (8.6x), which shows that the market has already priced in a marked slowdown in these sectors. Conversely, consumer goods (25.9x) and technology (21.1x) are very richly valued, despite interest rates (nominal and real) remaining close to their levels at the start of the year(2).
In this environment, which was hardly conducive to value over the month of May, R-co Conviction Equity Value Euro held up well, posting a decline of 2.7%, i.e. an underperformance of 0.2% compared with its benchmark index, compared with an underperformance of 1.4% for the value style over the month(3). Most of the underperformance was due to an under-exposure to the technology sector, whose valuation is not compatible with our value bias. This was partly offset by favourable stock selection in the banking (Société Générale), industrial goods (Alstom) and travel leisure (Ryanair)(4) sectors. Like the market as a whole, the publication season was generally reassuring for the companies in the portfolio.
We have continued to strengthen the portfolio's defensive positioning in the face of persistent macroeconomic uncertainty.
Firstly, we added Coca Cola Europacific Partners, Europe's leading bottler, because of its defensive/quality profile. The stock offers a very defensive profile and a reasonable valuation (15.3 P/E 2024) within the food/beverage sector, which has risen sharply in value. The Group offers attractive growth potential in Asia, and its valuation does not reflect the Group's margin guidance, which we believe to be credible.
We have also reduced our positions in cyclical stocks in the portfolio that could suffer in a more adverse macroeconomic environment and which were performing well YTD: Deutsche Post, Unicredit and Inditex in particular. We have also reduced our overweight in the automotive sector to neutralise our positioning in this sector. We fear a price war in Europe on electric vehicles led by Chinese manufacturers and Tesla, which could have an impact on European manufacturers. We have therefore reduced our positions in Stellantis and Mercedes.
Finally, we have maintained a significant liquidity position in the portfolio, which stood at 7.8% at the end of May. The defensive/liquidity pillar of the portfolio represented 36% of net assets, up 2% on the previous month.
The strong rotation in favour of growth since March (post-banking crisis) has wiped out the outperformance of value over three years. The market seems to be taking the view that we are about to return to the interest-rate regime that prevailed in the pre-COVID period, which seems to us to be greatly exaggerated. In our view, the underperformance of the value style is an attractive entry point relative to growth, especially as sectors such as technology and consumer goods will not be immune to an economic downturn, which is not reflected in their current valuation levels, unlike value sectors. Even though inflation has peaked and is now beginning to fall, we remain convinced that the inflation regime has changed compared with the previous decade, which will have consequences for interest rates.
