Monthly Newsletter Coeli European – November 2024

This material is marketing communication.

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 KID of the relevant Sub-Fund here.

November Performance

The fund’s value increased by 0.4% in November (share class I SEK), while the benchmark increased by 1.3%. Since the change of the fund’s strategy at the beginning of September last year, the fund’s value has increased by 22.1% compared to an increase of the benchmark by 11.7%.

Source: Coeli European

* Adjusted for spin-off of Rejuveron

** Includes September 1 (strategy change to long-only implemented September 4 2023)

Past performance is not a guarantee of future returns. The price of the investment may go up or down and an investor may not get back the amount originally invested.

Equity Markets / Macro Enviroment

Where does one begin after everything that has happened in the last few weeks? For the world's politicians, economists and investors the starting point and epicentre is the consequences of the US election where the US president-elect is named Donald Trump. It was an historic event in many ways and one which has already left a big mark on the world's financial markets. The fund rose by 0.4% during November compared to the benchmark which rose by 1.3%. Some other reference indices show the SXXP600 +1.0% and Russell 2000 (US small caps) +10.8%. For the full year, the fund has risen by 14.4% compared to the benchmark, which has risen by 12.1%.

The image below shows November's development for several different markets. Second to the right in local currency and to the right of that measured in Swedish kronor. The conclusion is that the USA wiped the floor with Europe. November was the best month for US stocks since 1998 and 2024 looks set to be the best year compared to European stocks since the early 1980s! Nearly 10% points difference between Sweden and the USA measured in Swedish kronor, in one month!

Source: Bloomberg

During the month, we spoke with, among others, the management of our portfolio company, Diploma, which has around half of its sales in the USA. Diploma's management in the US is more optimistic than ever and we understand them. The Russell 2000 was the best performer of the major American indices in November, rising by a whopping 10.8%. By comparison, Carnegie's small company index fell by 3% measured in USD. The difference is two annual returns in four weeks, something that will go down in the financial industry's history books.

Illustrated in another way, this year's return can be seen below. Germany leads the league, and it is a bit of a paradox that when there is a political crisis in Germany, as it was in November, share prices rise as investors begin to hope for a change. During the first 11 months of the year, OMXS30 (Stockholm index) had only risen by around 5%.

Source: Bloomberg News

The share of the American population that believes in continued stock market gains has never been higher.

Source: Macrobond and Nordea

Enormous amounts of capital, especially passive, have flooded into the American stock market in a short time. The inflow the day after the election was one of the largest ever, see below for banking and finance.

Source: Goldman Sachs

Many are overweight the US now – a clear consensus position. The euphoria is somewhat reminiscent of when Ronald Reagan became president in 1980. We note that at that time the P/E ratio was 7.5x and 9% of the population's wealth was in stocks. Today, the corresponding numbers are 23x and 41%. The enormous inflows have in a short time increased the valuation difference with the rest of the world to new high levels, see picture below.

Source: FactSet, Goldman Sachs Global Investment Research

All European markets except Denmark (Novo Nordisk) are valued lower than the 10-year average.

Source: Kepler Chevreaux

The picture below is almost too awkward to show, but we'll do it anyway. What have Europe's politicians been up to for the past 15 years?

Source: Bofa Global Investment Strategy, GFD Finaeon

Source: X

The sector in Europe that has fared best after the American election is the defense industry, not much of a riddle.

Source: UBS

In Europe, many raised their eyebrows when, due to continued political disagreement, France had to pay a higher interest rate on its government bonds than Greece. It is unprecedented. It has also left its mark on the French stock market, which has been really weak this year with -4.1% return as of the end of November.

Source: Bloomberg

Bad news about the Eurozone economy kept trickling down in November and PMI fell from 50.0 to 48.1. Those hoping for a double reduction in the interest rate in December will be disappointed. The ECB is not known for being ahead of the curve but rather driving forward on a tortuous path with the help of the rear-view mirror. Also in the UK, PMI fell in November from 51.8 to 49.9. In the US, it rose from 54.1 to 55.3.

The outlook in Sweden is better, where the confidence indicator of the manufacturing industry increased by 4.2 units to 95.8. The confidence indicator for construction activities also increased by 4.2 units to 98.4. The household confidence indicator rose for the fourteenth month in a row(!) and is slightly above the historical average. Expectations for the household and national economy in Sweden twelve months ahead are considerably more optimistic than normal. We also add here that on December 2nd we got access to the Swedish PMI figures which rose from 53.2 in October to 53.8 in November. Good!

The euro has weakened significantly against the US dollar in a short time.

Source: Bloomberg

Given that our base is Sweden, we must include this image as well, which shows the Swedish krona against the US dollar. During the fourth quarter and so far, the dollar has strengthened by 7-8%, which are huge numbers in this context. We guess that analysts will in the near term adjust their profit estimates for companies with a lot of sales in the US (and perhaps most preferably with the majority of costs in SEK).

Source: Bloomberg

The collapse of Northvolt has even got the attention of international media. We hope and believe that it will not have too much of a spillover effect.

Source: Financial Times

The price of Bitcoin has gone straight up after the US election, reaching new highs.

Source: The New York Times

Premium German cars, on the other hand, have a tougher time in China.

Source: X, Michael A. Aouret

Things will move quickly from January 20 onwards when Donald Trump and his new administration are installed. Various ministers have already been nominated and among those there are some question marks. Fox News contributor Pete Hegseth is expected to become Secretary of Defense, Robert F Kennedy Jr. Secretary of Health, known as a major vaccine opponent. Pam Bondi becomes attorney general after first-time candidate Matt Gaetz withdrew amid allegations of sex with a minor, to name a few. The nomination of Scott Bessent as Treasury Secretary, a well-known hedge fund manager, was well received by the market (see developments of the US 10-year yield below). A somewhat softer tone on tariffs and also a certain focus on reducing the US budget deficit contributed positively.

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Source: Ice data indices, Federal Reserve, Financial Times

We note that Warren Buffett has a greater proportion of cash today than during the financial crisis.

Source: Bloomberg

American insider sales are at an all-time high. Historically, however, it has not been a particularly good sales indicator.

Source: Financial Times

We have watched with some envy at the returns that US stocks have given in recent weeks. One of the stranger developments in the recent period (we think) has been Swedish real estate stocks which have fallen by just over 13% since the peak in early October while the Swedish two-year interest rate has fallen from around 1.8% to today's 1.6%.

In the United States and since the beginning of October, the American two-year interest rate has risen from approximately 3.6% to today's approximately 4.2%. It had no negative impact whatsoever on US real estate stocks, which rose 5.7% in November.

Study the image below. The prerequisites for Swedish real estate stocks to rebound feel unusually good and we have recently increased our real estate exposure by buying more of the logistics company SLP, which is one of the fund's larger holdings.

Source: Macrobond and Nordea

The same message illustrated in another crystal-clear way, thanks Mikael Sarwe at Nordea.

Source: Macrobond and Nordea

A huge change for the better in a short time has taken place in terms of credit spreads for real estate bonds. Study the curve for Balder for example. Incomprehensible.

Source: DNB Markets Credit Research

If you've read this far, you're probably wondering why you should allocate part of your portfolio to European stocks at all? The answer is that if you find any fund that over time has created excess value through active management, that takes real company risk based on fundamental factors instead of investing in a stock based on how many points the stock weighs in an index, it is highly reasonable to allocate part of the capital to such type of management.

Nowadays, most of the inflows go to passive funds and ETFs, which we deem sad. An increased inflow of passive capital leads to greater buying pressure, to a higher valuation, to an increased number of points in the index, to more passive buying and so on. The higher the company's valuation, the higher the demand from passive capital. It doesn't feel right and that's why the stock market works completely differently today compared to just 10 years ago. The advantage for people like us is that it creates opportunities that did not exist 10 years ago. Having said that, it requires a certain amount of patience.

Source: Goldman Sachs

To return to European stocks and if we allow ourselves to mention some of the fund's best performing European stocks this year, it is Bonesupport which his risen by 94%. The company has its headquarters in Lund, thus Swedish and European, but has most of its operations in the USA. Switzerland's Accelleron, which has risen 87%, has 70% of its operations outside Europe. British Diploma, which has risen by 24%, has about 50% of its turnover in the US and close to 60% of its profit. Finnish Cargotec which spun off Kalmar earlier in the year, has together risen by 76% and has 60% of its turnover outside Europe. The point of the above is that the location of a company’s headquarter is rather irrelevant.

Two things determine the performance of a stock over time; the company's ability to create value and the price you pay for the share. There are many European small and medium-sized companies that create value and where the valuation is low and that is the reason why Europe remains interesting. But today's algorithms don't pick up on what (fewer and fewer) value investors pick up on. The algorithms run on momentum, profit growth and technology. It is not something that immediately pops up among Europe's larger companies and among the smaller companies there are significantly fewer ETFs and passive capital that invest. Which investment is most attractive? Tesla at P/E 145x or VW at P/E 3x? It is not possible to answer as passive flows now largely determine price and valuation in at least the short and medium term.

On Saturday, November 30th, the Financial Times wrote that there is a sale on for European companies. In the last days of November, there were as many as four buyouts on the London Stock Exchange with a total value of £5.3 billion. Buyers were companies from Canada, Abu Dhabi, Australia and Europe. As you may remember, the fund had a takeover of British Wincanton at the beginning of the year. The trend is likely to continue unless valuations rise on their own. The pressure today on company management is significantly higher than it was before, and we note that European companies are buying back more shares this year than ever before - a positive thing.

We maintain our positive outlook for the small and medium-sized companies asset class. We also note that the Russell 2000 had a stronger development than Nasdaq during November.

• Interest rates in Europe are very likely to continue to fall, which has historically benefited small companies the most.
• Growth for the asset class SMID (small and medium-sized companies) is significantly better than for larger companies.
• The valuation difference between small and large companies is at historically high levels.
• Finally, smaller companies should fare better than larger companies in terms of duties and tariffs, as they typically have a higher proportion of domestic sales.

Source: Bloomberg

After such a sharp underperformance of Europe compared to the US, there should be good conditions for a reversal. But as we have said many times before, this fund is not a mirror image of the larger stock market but consists of a portfolio of what we think are 15-20 interesting and attractive investments, where the expectation of investors should be to get excess return in the long term in relation to the market.

At the time of writing, there are only 18 trading days left in the year. A year that, as usual, offered great drama and many interesting days. We thank you all for valuable collaboration, great input and shown interest. We are now all looking forward to a peaceful Christmas with family and friends and not least a generous Santa.

Merry Christmas & Happy New Year!

Mikael & Team
Malmö, December 5th