Fund Update : R-co Conviction Equity Value Euro — December 2023

After a three-month slump, the equity markets rallied in November, with gains of +6.0% in euros by the S&P 500, 6.3% by the MSCI World, and +8.0% by the EuroStoxx¹. The rally was driven by a weakening in inflation, a sharp pullback in sovereign yields, and the hope of a soft landing, a hope that look far from assured just a few weeks ago. This environment provided a big boost to sectors that are sensitive to falling interest rates (Real Estate +15.0% and Technology +14.3%), whereas Defensive sectors took a hit (Healthcare +0.8%, Food Retailing -1.4%) and Energy flatlined (+0.4%), owing to uncertainties on OPEC’s² future direction.

This market configuration favoured the Growth style³ (+10%), which outperformed Value⁴ by 460 basis points on the month², despite a reporting season that was tilted more towards Value than to Growth for the 10th consecutive quarter. All in all, Value’s P/E⁵ did rise from 8.4x to 9.0x on the month, but less so than Growth’s, which rose by 2 points, from 18.6x to 20.6x. Value is now trading at a 19% discount to its historical 10-year median (at 9.0x vs. 11.1x), vs. a 5% discount for the market as a whole (12.2x vs. 12.9x), and a 25% premium for Growth, at 20.6x vs. 16.5x)⁶.

The outperformance of Technology and underperformance of Energy drove an allocation effect that naturally penalised our fund in November, but the surge in some of our convictions (Siemens +23%, Vonovia +17.6%) generated a positive stock-picking impact. As a result, and despite the aforementioned environment’s undermining the Value style, R-co Conviction Equity Value Euro gained 7.3% in November, and at month-end was outperforming its benchmark by +0.4% on the year to date⁷.

Economic statistics looked rather good in November, particularly in inflation, which receded more than expected on both sides of the Atlantic. While the main central banks kept their key rates at historically high levels, their language was slightly more dovish⁸. This gave investors a glimpse of the pivot they have been waiting for over the past several months and caused them to reset their bearings in favour of risky assets, something that also boosted the equity asset class. Meanwhile, a looser job market, solid third-quarter US GDP, and prospects for growth in real wages in 2024 made the scenario of a soft landing⁹ more realistic.

In reaction, we took on a more constructive approach to our portfolio early in the month, adding to our exposure to cyclical stocks. In doing so, we opened a position in AkzoNobel, a chemicals company that is likely to benefit from lower commodity prices and its new CEO’s restructuring plan. Moreover, consensus forecasts look conservative, and its valuation is at a historic low. And, lastly, AkzoNobel should get a boost from falling interest rates, given its relatively heavy debt burden. It is also for this reason, along with our constructive view on natural gas and electricity prices, that we also initiated a position in RWE. Meanwhile, we added further to our exposure to ArcelorMittal and TotalEnergies, given the outlook for strong business in 2024. Revisions in earnings growth forecasts since the start of the year seem to be based on an excessive slowdown scenario.

The Value style in Europe remains especially attractive in valuation terms. Value’s natural cyclical bias should give it a boost during the soft landing that now seems to be taking shape. With this in mind, we are now overweighting: i/ cyclical sectors and stocks that we feel have priced in a marked slowdown in the economy; ii/ stocks that are sensitive to the ongoing normalisation in inflation and interest rates. The current environment has made the equity markets attractive once again, and it should, moreover, remain favourable to R-co Conviction Equity Value, which has now outperformed its benchmark by far (+7.7% over the past three years¹⁰).