The European Smaller Companies Trust Fund Manager Commentary – June 2022
3 minute read
Ollie Beckett, Portfolio Manager of The European Smaller Companies Trust, delivers an update on the Trust highlighting they key drivers of performance over the month of June and outlines recent portfolio activity.
June saw further poor returns for risk assets, completing one of the worst first-halves of a year that we have witnessed for global stock markets in over 50 years. Investors have moved from pricing a market for higher inflation and weak growth to one facing a severe recession.
Trust performance and activity
June proved to be a punishing market for those stocks perceived to have a high degree of embedded cyclicality, with economic fears trumping any perceived 'margin of safety' achieved by owning more attractively priced shares. This was evident among the fund's weakest performers, namely TKH (industrial/technology conglomerate) and DFDS (passenger and freight ferries), as well as AMG and Befesa which have seen the price of their speciality metal products fall on the latest growth fears. As we have stated in recent reports, we believe the earnings of certain 'cyclicals' will prove more resilient through the next downturn as either structural tailwinds (Green CAPEX for example) or the restructuring programmes of management teams have improved earnings volatility. Also among the main detractors was EDreams, which is an outlier in the portfolio with regards to having a stretched balance sheet. Stresses around liquidity in credit markets has in general seen companies with weaker balance sheets punished. However, we remain holders as we expect travel demand to remain high despite the journey disruptions many are facing. Positive contributors were more stock specific. FLEX LNG announced extensions to customer contracts with regards to its liquefied natural gas (LNG) vessels and the market gained more confidence in the company's mid-term prospects as a result. U-BLOX has been seeing strong demand for its products in the internet-of-things (IoT), and Renewi (waste management) continued to respond well to the results it announced in late May. Activity over the month was limited and we made no outright purchases. We decided to top up the holding in Inficon, which manufactures vacuum instruments used in the production of semiconductors. The near-term direction of the semiconductor cycle remains a highly contentious topic but we believe the company looks well placed on a medium-term view.
We expect the rate of inflation in Western economies to start to subside through the middle of 2022, as supply-chain shortages begin to clear and as we begin to lap the comparison period of energy price rises. However, our core thesis since the extreme monetary and fiscal policy responses of 2020 was that inflation would settle at a level above that of the last ten years, and that the period of deflation/disinflation we have seen since the Global Financial Crisis is over as a significant capital expenditure cycle in the Green Transition and Digitalisation occurs. For this reason we believe our valuation-aware, blended-style approach will be better suited to the next market cycle versus the last. In the near term, economic momentum is deteriorating and many valuations now imply a severe recession. We think this presents a great opportunity for a bottom up stock-picker taking a longer-term view.
These are the views of the author at the time of publication and may differ from the views of other individuals/teams at Janus Henderson Investors. Any securities, funds, sectors and indices mentioned within this article do not constitute or form part of any offer or solicitation to buy or sell them.
Past performance does not predict future returns. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested.
The information in this article does not qualify as an investment recommendation.
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