Note that the information below describes the share class (I SEK), which is a share class reserved for institutional investors. Investments in other share classes generally have other conditions regarding, among other things, fees, which affects the share class' return. The information below regarding returns therefore differs from the returns in other share classes.
Before making any final investment decisions, please read the prospectus, its Annual Report, and the KIID of the relevant Sub-Fund here
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Monthly Newsletter Coeli Absolute European Equity – July 2022
JULY PERFORMANCE
The fund's value increased 6.3% in July (share class I SEK). The Stoxx600 (broad European index) increased during the same period by 7.6% and HedgeNordic's NHX Equities rose provisionally by 3.9%. The corresponding figures for 2022 are a decrease of 21.8% for the fund, -10.1% for the Stoxx600 and -4.8% for NHX Equities.
EQUITY MARKETS / MACRO ENVIRONMENT
After one of the worst first six months ever, July was the opposite with a strong return on most of the world's stock markets. We came from extremely oversold levels and investors had record cash levels. Only two percent of S&P500 stocks were above their 50-day moving average a month ago, which has happened only five times in the past 20 years. By the end of July, it was clear that the S&P500 had its best July since 1939 with a 9.1% return compared to the broad European index which rose 7.6%. The fund's value increased by 6.3%, more on that later.
The image below shows the returns of various sectors last month. Clear winners were in technology, industrial companies and real estate companies, while the more defensive companies had a more challenging development. Interestingly, among July's five worst stocks in the SXXP600, all (!) were defence stocks: Rheinmetall, SAAB, BAE Systems, Dassault and Leonardo.
Source: Goldman Sachs
A high-octane fuel for technology and growth stocks was the sharp decline in interest rates in July. The American 10-year, which was at levels around 3.50% in June, fell back to around 2.60% The German equivalent was halved in a short time from 1.60% to 0.80%. The sharply falling interest rates, in turn, were due to increasingly clear signals that the economies of various countries are at risk of falling into a recession. The falling interest rates have also put pressure on real interest rates and, for example, the American (10-year) real interest rate is now around zero percent again, see picture below.
After the initial market rebound consolidated, it was time for the Federal Reserve to communicate and update the world on their views on inflation and the economy. As expected, there was a second triple increase of 75 points, but with a slightly softer tone than before. The new message was that they now consider the interest rate to be "neutral" and that in the future it is different economic data that will determine the development of the interest rate. They also removed a forecast about economic developments. The market interpreted this positively, that the worst is behind us, which in turn led to the strongest two-day development after a FED meeting since the 1970s. With a generally low positioning among investors, it is not a bold guess that this "rally" was highly undesirable. The image below shows the development of the US key interest rate so far this year and forecasts for the rest of the year. After that, interest rate cuts are now expected in 2023 (the latest estimate indicates -85 points).
One of the reasons why the FED softened somewhat is signals like the one below which show what the business climate is like for smaller companies in the New York region. Rock bottom, as you can tell, and even slightly worse than during the financial crisis.
Apart from gas, oil and electricity, the vast majority of raw material prices, including wheat, have fallen sharply in recent months, which is very positive.
Below is an excellent graph explaining why the Euro has collapsed against the USD. While Europe has put itself in a really bad place with an unimaginably naive energy policy, the US has had a determination of being self-sufficient. The American gas price has basically not moved in recent years. Painful to watch.
Sweden has also been very good at self-harm, where for more than 20 years they have been unable to increase electricity capacity in southern Sweden. At the same time as six nuclear power reactors were shut down, no new and larger power sources have been added. It will be extremely tough financially for many households (and businesses) this winter and the Swedish power grids communicated and prepared southern Sweden to cut electricity for certain hours this winter! Forecasts indicate that the price of electricity in southern Sweden will be at least twice as high as last winter. As a data point, I can state that our villa accommodation and summer house in December 2021 had electricity bills of a total of SEK 27,000 and it now looks to be doubled (both houses have an air source heat pump). In that case, it means that you have to have a gross salary of SEK 100,000 just to pay the upcoming electricity bill in December.
Good job above all by the Social Democrats and the Green Party who shut down Oskarshamn 2 (2015), Oskarshamn 3 (2017), Ringhals 2 (2019) and Ringhals 1 (2020). At the same time, our Environment Minister, Annika Strandhäll, thought in an interview on SVT that two nuclear power plants were shut down and three were in operation (the correct answer is six and six respectively). Sweden's energy policy is like a nightmare and it will last for many years. In practice, it is like an extra tax because we had incompetent politicians who, in exchange for government power, overturned an exceptionally well-functioning energy supply.
Source: Steget efter
We top the above with the latest GDP forecasts for Europe published by the European Commission last week. Sweden is expected to have the lowest economic development in the entire EU in 2022 and the picture for 2023e unfortunately looks exactly the same - Sweden is last!
Source: EU Commission
Italian Prime Minister, Mario Draghi, tendered his resignation during the month causing Italian credit spreads to widen significantly. The combination of a highly indebted country (135 % of GDP) and the EU's third largest economy is not brilliant and since last autumn the interest rate in Italy has risen from around +0.5% to just over 3% (the highest level of around 4% was reached when Draghi announced his departure). The sharp rise prompted the ECB to search its toolbox and construct a new solution – TPI. The Transmission Protection Instrument will enable the ECB to buy bonds in countries that it perceives have had or are experiencing a significant and unwanted deterioration of financial conditions.
In the end, even Boris Johnson could not withstand the pressure from the public and his own ranks. Our monthly newsletters will be a tad boring as the constant scandals will now probably disappear, but for the world and not least Europe, it is a blessing that Boris is stepping down as Prime Minister of Great Britain. On the same day he resigned, the British pound strengthened significantly, which says a lot. In his closing speech, he gave a number of pieces of advice to his successor: "Keep us close to the Americans, stand up for the Ukrainians, stand up for freedom and democracy everywhere and cut taxes and deregulate wherever possible." His last words in Parliament were – “Hasta la vista, baby”
Long positions
Truecaller
During the month, Truecaller released yet another report that exceeded expectations. Perhaps the numbers speak for themselves:
- Sales increased by 100% compared to the previous year
- The operating margin amounted to 44% and operating profit rose by 163%
- The number of monthly and daily users rose by 15% and 17%, respectively
- As of the last quarter, Truecaller had roughly 320 million monthly users
With a low-capital business model the cash flow follows nicely and most of the profit turns into cash on the balance sheet.
Operationally, most things are going Truecaller's way right now. The company continues to release new features and products, which has increased user engagement (measured as the number of monthly users who are also daily users). The geographical diversification continues even though India will be the company's largest market for a long time. We are impressed by Truecaller's latest business division, Truecaller for Business, which basically went from zero revenue at the start of 2020, to an estimated turnover just above SEK 100 million in 2022.
Even though business is going very well, the share has had a 2022 with peaks and valleys against the background of the year's opening "tech-freak", placements and a couple of critical articles in the Indian press (which we covered in previous monthly newsletters). It should also be said that the share price was high at the start of the year. After the report for the second quarter of 2022, the market chose to reward the stock significantly for the first time. The price increase for July landed at 61%. The price rise from the IPO last year to the end of July was approximately 52%. Truecaller was the fund's strongest contributor in July with a positive impact of approximately 2.50%.
Lindab
The Lindab share has had a tough time this year against the backdrop of general economic fears (and a high valuation at the start of the year). Although the first half of 2022 is now history, there is little in those reports to suggest a slowdown. CEO, Ola Ringdahl, also believes in stable demand during the remaining part of 2022. The big question is rather what the demand will look like in 2023–2024.
Although Lindab is not immune to recession, there are several mitigating factors:
- The company has a large exposure to renovation projects, which are typically less affected by recessions.
- Lindab's large investment program has only been half implemented, and will continue to contribute to profitability improvements regardless of the state of the economy for several years to come.
- Europe's energy crisis will most likely increase the demand for energy-efficient ventilation. In this area, Lindab has launched products with a quick payback period for the end customer and which can be easily installed in already existing ventilation systems.
- Lindab should be able to gain market share in a worse economic climate (as proven during the pandemic).
- The stock is trading today at single-digit earnings multiples on our estimates, which suggests that the market has already priced in some concerns in advance (given that our estimates are reasonably correct).
Many are also worried about the impact a falling steel price will have on sales, which have been very positively affected by price increases in recent quarters. We do not believe that Lindab will lower prices with a 1:1 relationship to the steel price because the company, among other things, continues to see large cost inflation in other areas (transport/logistics, energy, wages, etc.). That will have to be compensated by means of price adjustments.
All in all, we have a positive view on Lindab's prospects even in a tougher economic climate. We believe that today's valuation is pricing in too much forecasted troubles. After another good report (beating expectations by around 4%), the stock rose 19% in July and was the fund's third strongest contributor with a positive impact of around 1%.
SLP
It was a strong month for the SLP share, which recorded an increase of 31%. The report for the second quarter came in above expectations but without any major surprises. Despite a very challenging market, the company made acquisitions for SEK 0.5 billion during the first half of the year and the net asset value per share rose by 58% compared to the same period last year. Most of the transactions are off-market or via sales-lease-back, which allows SLP to buy at superior prices to the market. The company delivers fully in line with our expectations and we continue to like the stock, which is valued at just over P/E 19x 2023e. The stock has risen 24% since we invested in the IPO. SLP was the fund's second strongest contributor in July with a positive impact of approx. 1.2%.
ISS
The ISS share had a good month with a price increase of 13%, which brings the full-year figure to just over 1%. During the month, several companies in the sector (Compass Group, Elior, Sodexo, Coor, etc.) reported overall good numbers. It has likely spilled over to the ISS share. We also note that a company like Securitas, which is also characterized by being a very staff-intensive business, has managed to dodge wage inflation nicely so far. We believe that the concern over salary inflation for ISS is exaggerated. Whether we get it right remains to be seen. The next report will be in August.
Wincanton
The British logistics company came up with another positive update in July. The influx of new customer contracts continues and the company has succeeded well in compensating for inflation. Under its new management, Wincanton has succeeded in turning the business around in an impressive manner. However, the valuation has not yet adjusted in our favor, even though the investment has been okay so far (the stock has advanced about five percentage points since our initial investment). We believe that it is only a matter of time before the revaluation comes. Logistics companies are often highly valued on the stock exchange, and Wincanton's business is increasingly directed towards customers who operate in structurally growing markets. The stock rose 9% in July.
Teleperformance
France's Teleperformance, which mainly deals with the outsourcing of customer support and related services, reported a fine result for the first half of the year in July. There are still no clear signs of a slowdown in their business. On the contrary, Teleperformance has historically been successful in winning new contracts during recessions when their customers can save money by outsourcing their customer service to them. The stock rose 11% in July.
Tate & Lyle
Our investment in Tate & Lyle has been one of the best of the year, having risen by around 26% (31 percentage points better than the European index) since we invested around six months ago. The main points of our investment thesis can be read in our February newsletter. So far, the whole thing has played out roughly as we thought: after the divestment of 50% of the company's less valuable segment, Primary Products, there has been an increase in valuation as Tate & Lyle has been able to more clearly highlight good results in the golden product segment, Food & Beverage. The rise for the month of July landed at 7%.
Rejuveron
As previously described, since December 2019 we have had an unlisted holding in Swiss Rejuveron which is a biotech company. In April, a new capitalization round was carried out where the valuation increased from CHF 30 to CHF 120 per share. The company has had a good operational development this year, but in view of the sharp decline in the stock market during May and June (even though, as you know, it rose in July), we have chosen to write down the valuation by 15%. The fund's value development in July was affected by approximately -0.7% because of this. The company aims for a stock market listing in 2023.
Biovica
Saturday the 30th of July, Biovica also took the opportunity to deliver long-awaited news. Their product DiviTum received FDA approval (510(k)) and thus the US is opened up for sale and clinical use of the product. The decision was delayed for over a year as a result of Covid-19 priorities at the FDA and specific issues surrounding DiviTum. The company already has an organization in place in the US and is now ready to launch the product before the end of the year. This is the biggest thing that has happened in the company's history and we are happy to have been involved in making this journey possible.
Short positions
The short portfolio contributed negatively during the month. Our short positions on a Swedish small-cap index had the biggest negative contribution together with our positions on the German DAX. A couple of stock specific short positions that contributed positively to the result were German Adidas and Swedish SCA.
Exposure
The net exposure, adjusted for our unlisted holdings, at the beginning of the month was 52% and 68% respectively.
Summary
We finally got to experience a strong equity month. Our companies' earnings in the second quarter made us and other investors happy and we saw a stock market that, unlike earlier this year, behaved more rationally. There was still some volatility, but significantly less than before and it was easier to understand different price movements. What was also pleasing was that the breadth of the market, the number of stocks that rose, increased which indicates that this upturn is of higher quality than the others we saw during the spring.
A month ago, participation in the stock market was at a record low due to record pessimism. One swallow doesn't make a summer, but anyone who has studied the historical pattern could conclude that when the bow is so tight, it doesn't take much for share prices to rebound upwards. That's how it happened this time too, and we got to experience the strongest July in over 80 years. For those of you who like statistics: in the months when the stock market rose by more than 9%(based on roughly 80 years of history), the development six months later was +12.3% and twelve months later +17.6%.
The quarterly reports for the second quarter of 2022 have in many cases been surprisingly good, not least regarding the outlook for the second half of the year. Below shows how the companies within the Stoxx600 delivered in relation to the market's expectations. The best sector/industry was mining companies, which beat expectations in 78% of the cases, while real estate companies were the worst sector. The picture is as of the end of July/August, so a small percentage of companies are missing.
Goldman Sachs' risk monitor shows a continued cautious positioning even if the most extreme levels of a month ago are in the past.
The risk premium is still at high levels (10.9 on July 29), which is higher than the average for the last 11 years. This implicitly means, with an assumption that the risk premium should go towards the historical average, that the profit estimate should be reduced by 8%. Note the sky-high risk premia in auto, financial and energy stocks and thus the implied downward revisions to earnings discounted into its share prices.
Source: Kepler Chevreux
Valuations in Europe are at historic lows with a modest P/E of 12x trailing 12 month earnings. However, it is not the valuation that is the problem right now, but only how much the companies' earnings should decrease.
Source: Goldman Sachs
Values for different regions currently look like below. There is still a very large difference between Europe and the USA.
Source: Goldman Sachs
The following illustrates how value stocks have developed in relation to cyclical sectors over the past 20 years. The development goes in waves and is reasonably in sync with the economic development. The relative excess return for defensive stocks this year is significant and it is likely that the trend will turn around sometime this fall (our view).
As previously communicated, we assess that we are around the highest levels for inflation and thus also for the interest rate. A sharp fall in interest rates in July boosted growth stocks while value stocks lost relatively, see graph below. We also came off extremely depressed levels and not since the Lehman crash has the Nasdaq been below its 100-day moving average for such a long period.
The PE number for the highest valued companies in Europe a year ago compared to today. Interesting that there are many Nordic companies on the list. The fund has had a short position in Vestas for an extended period.
Source: Kepler Cheuvreux
The takeovers continue and today, when this is being written on August 3rd, Italian Tod's, for example, has received an offer. In Sweden, Swedish Match, Leo Vegas, Haldex and Cary Group have received takeover offers in recent months. The venture capital companies still have enormous amounts of capital to put to work, see below. Our feeling is that the activity of these actors has been tentative in recent months, but we guess that it will pick up again after the summer.
Source:Goldman Sachs
The repurchase mandate starts again after the reporting season and 2022 will be another record year.
Source: Goldman Sachs
In summary, we maintain our view that the market is trading within a range. A month ago we were in the lower range and now in the higher range. There are many indicators that look better than a month ago and the companies have in many cases impressed the market, but we are probably not yet on safe ground. Our best assessment is that the next FED meeting in September will determine much of the development during the autumn. The chances that we can break out of the current trading range after that are relatively good.
What could continue to drive share prices up in the coming weeks are:
- Continued careful positioning in the starting position
- Expected large purchases of shares from systematic macro strategy funds and quant funds in coming weeks (JPM estimate)
- The share of short equity positions remains at the highest levels in two years
- Big buy-back programs will start rolling again
- A certain risk appetite has returned
What speaks against continued uptrend is that the rise has been unusually strong. In addition, we continue to have very large geopolitical problems. We are also approaching September, which is typically the worst month of the year, see picture below.
Source: Top Down Charts
As you know, we do not spend our working days trying to find the bottom and the top in the market, but invest in the companies we believe have the right circumstances to create significant value for their owners in combination with an attractive price of the share. Those are the only two components required to create excess returns over time. Finally, we can also announce that at the turn of the month we started our new mandate that we told you about last month. There are clear overlaps in terms of holdings and of course strategy and we would like to thank everyone involved at Coeli for a flawless delivery!
Mikael & Team
Malmö on 8 August 2022