September, 2023
The Fund (C Class) returned -2.5% for the quarter.
Banks and Energy were among our best performing investments this quarter.
Rising interest rates allowed banks to expand net interest margins by revising the interest rate they charge on loans ahead of the interest rate they pay on deposits. This margin expansion more than made up for the drag from rising labour costs and weakening loan demand. European banking regulators have also become more amenable to share buybacks, which helped our holdings’ performance. These encouraging developments notwithstanding, we decided to trim our holdings in Banca Transilvania and Komercni Banca and exit our position in Raiffeisen Bank. In our view, much of the current tightening cycle is behind us and margin pressure will return if economic activity continues to weaken.
Europe is currently working to re-engineer its energy supply chain. Where it has historically relied heavily on piped Russian oil and gas, the region is now investing heavily in infrastructure to allow them to import seaborne cargoes from a wide range of suppliers. This will improve energy security medium-term but leaves the region vulnerable to near-term supply disruptions. The recent threat of strikes at Australian LNG facilities reminded the market of this vulnerability and kickstarted a rally in European gas prices. Russia also moved to curb exports of refined products which pushed refining margins higher. Early in the quarter we added to our holding of Torm, a shipping company that owns refined product tankers.
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/PEFqtr_0923.pdfJune, 2023
The Fund (C Class) returned 3.0% for the quarter.1 European equities ended the quarter modestly higher, supported by robust corporate earnings, which in turn benefited from euro depreciation in 2022 and a surprising degree of pricing power.
Euro Area inflation peaked at 10.6% p.a. in October 2022.2 Wage inflation was around 5% p.a. at the time. This resulted in a large income transfer from labour to business, which is unlikely to persist. Indeed, inflation has now decelerated to 5.5% p.a., while wage inflation is practically unchanged.
The yield on two-year German bunds is currently 3.2% p.a., below core inflation at 5.4% p.a. It is also below the European Central Bank (ECB) policy rate of 3.5% p.a., with more rate hikes flagged.3 This low yield implies that bond markets expect significant rate cuts at some point over the next 24 months, presumably due to disinflation and slowing economic activity. This is at odds with buoyant equity markets.
Among our best-performing stocks were Applus Services (+37%), Ryanair (+17%) and ASML (+6%). Applus is a Spanish-domiciled testing, inspection and certification business trading on a low valuation, which has attracted interest from private equity groups. Ryanair is benefiting from a resurgence in travel demand, while ASML is expected to enjoy strong demand for its lithography equipment as companies invest to develop artificial intelligence (AI) capabilities.
Noteworthy detractors included Bayer (-14%), Fondul Proprietatea (-9%) and BioNTech (-13%). On the latter, we invested in BioNTech some years ago, attracted by its excellent research team and prospective drug pipeline. The stock has fallen around 70% from its 2021 highs as investors fret that COVID-booster sales will be weak. We recently began re-establishing a position. Not only does BioNTech still have the same excellent research team and drug pipeline that initially attracted us to the company, but they now also have EUR 20 billion of cash in the kitty.
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/PEFqtr_0623.pdfMarch, 2023
The Fund (C Class) finished the quarter on a strong note, rising 10.2% over the period.1 European markets continued to perform strongly, led by the Consumer Discretionary, Industrials and Information Technology sectors, as markets factored in slightly less negative business and consumer confidence. Financials, particularly European banks, had a very strong January and February but gave back some of their gains in March, following the bankruptcy of Silicon Valley Bank in the US and Credit Suisse’s forced merger with UBS.
Credit Suisse (not held in any of the Platinum funds) has had many highly publicised missteps in the last couple of years, but accelerating deposit outflows and counterparties curtailing risk required the Swiss bank supervisor and the Swiss National Bank (SNB) to orchestrate the merger to stabilise the bank and restore trust in the broader banking system. The cost of maintaining financial stability was borne not only by equity holders in Credit Suisse, which lost almost 90% of its value, but also by bondholders and Swiss taxpayers.2 While this is the first merger between two globally systemically important banks since the global financial crisis, thus carrying a significant execution risk, it will limit the spread of financial contagion.
On the other hand, the troubles of the US regional banks, such as Silicon Valley Bank and Signature Bank (see the Platinum International Fund report for further details), are more likely to have a significant impact on economic activity. Even before these events, there had already been a tightening in lending standards, both in the US and Europe.
Smaller US banks could adopt even more conservative lending standards in order to preserve liquidity, and these smaller banks, with less than US$250 billion in assets, account for a significant part of US commercial and industrial lending, residential real estate lending, commercial real estate lending and consumer lending.
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/pefqtr_0323.pdfSeptember, 2022
The Fund (C Class) returned -3.9% for the quarter.
European equity markets ended the quarter moderately lower. Higher-than-anticipated US infl ation data was released in September. In response, the US Federal Reserve (Fed) raised its expected path for interest rates to 4.5-5.0% by the end of 2023 and many other central banks echoed this anti-infl ation rhetoric. Investors are increasingly concerned that central banks will overreact, triggering a deeper-thannecessary recession. This ignited further appreciation in the US dollar and a sell-off in bonds and equities.
In late September, the Truss government delivered a minibudget which featured signifi cant tax cuts targeted at high-income earners in the UK. Wanton fi scal stimulus risks undermining efforts to control infl ation leading to even higher infl ation and interest rates. In this case, it may simply pile economic pain on average households while boosting discretionary income for the wealthy. The currency and bond markets were not amused, with longer-term interest rates spiking and the British pound collapsing to its lowest level against the US dollar since the Revolutionary War. For Europe, infl ation remains a key challenge. While infl ation rates are similar to those in the US, core infl ation is lower in Europe. Europe avoided the frenzied US fi scal spending that followed the COVID outbreak.
European infl ation is driven more by the depreciating euro and the decision to end reliance on Russian energy fuels. Thus, the outlook for infl ation and interest rates is more benign in Europe, although the disruption to energy supplies renders it more economically vulnerable in the near term. Unemployment remains very low in the euro area, with even youth unemployment at record lows. However, concerns around energy availability have devastated consumer confi dence, which is now well below its 2009 and 2020 lows. Consumers are battening down the hatches and holding back on spending. This is now being noted in companies’ earnings guidance.
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/pefqtr_0922.pdfSeptember, 2022
The Fund (C Class) returned -1.9% for the quarter and -11.5% for the year. The economic situation in Europe is deteriorating. Most worryingly, consumer price infl ation accelerated to 8.1% per annum in May. This compares to a rate of under 2% a year ago. A silver lining is that underlying or ‘core’ infl ation (excluding food, energy, alcohol and tobacco) is lower in Europe (3.8%) than in the United States (6.0%). The implication is that this affords the European Central Bank the ability to tighten monetary conditions with less urgency and aggression than the US Federal Reserve. This will see less pressure applied to asset owners and large borrowers, namely governments. However, one key reason that core infl ation is lower in Europe is that wage growth is running at a comparatively pedestrian 2.7% per annum. While this may spare the region from more aggressive rate hikes, it puts ordinary households under signifi cant stress as their purchasing power erodes. Indeed, real household incomes are currently falling 5.4% per annum. Unsurprisingly, consumer sentiment has plummeted to levels only previously observed during times of crisis. For now, the unemployment rate remains low, by European standards, at 6.8%. This should be supported in the near term by business sentiment, which remains comparatively buoyant despite having pulled back from recent highs. However, these data are backward-looking. It is unrealistic to expect this situation to persist with a strained household sector, the war in Ukraine, ongoing supply-chain disruptions, rolling lockdowns in China, rising interest rates and potential energy shortages.
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/pefqtr_0622.pdfMarch, 2022
The Fund (C Class) returned -11.3% for the quarter and -4.2% for the year.¹ It was a roller-coaster quarter threaded together by two distinct storms. For the first half of the quarter to mid-February, the market was concerned about rising inflation and higher interest rates, which resulted in expensive companies being sold off.
In our previous quarterly report, we mentioned that the ‘growth compounder’ companies trading on lofty valuations, such as Hermès International, represented high-risk propositions, in our view. Indeed, these stocks fell 20-30% early in the quarter, as it became evident that inflation was here to stay and both the European Central Bank (ECB) and the US Federal Reserve (Fed) were likely to tighten monetary policy faster and more aggressively than the market had priced in. As much as we recognised that some of these companies were quality businesses, their unfavourable risk/reward profile led us to a conscious decision to avoid owning them. Indeed, we opportunistically shorted a dozen or so of such excessively valued stocks and the Fund benefited from their recent derating.
The second half of the quarter was dominated by concerns over Russia’s invasion of Ukraine, the related sanctions and disruptions to global trade and money movement, and all the potential ramifications of these events. As at the outbreak of the war, the Platinum European Fund did not (and does not at the time of writing) hold positions in any company that is listed or predominantly operates in Russia or Ukraine. However, we were not entirely immune to the broad market sell-off triggered by the Russian invasion. Our holdings in travel companies, banks and other businesses with Central and Eastern European (CEE) exposures suffered the most, such as Wizz Air (-31%) and Raiffeisen Bank International (-50%). Allfunds Group (-40%), the Madrid-headquartered leading fund distribution platform with more than €1.3 trillion in assets under distribution, was another detractor due to its exposure to softer equity and bond markets and a weaker-than-expected quarterly result.
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/pefqtr_0322.pdfJune, 2021
The Fund (C Class) returned 6.2% for the quarter and 26.2% for the year.
Business sentiment is rebounding throughout Europe, with surveys of business confidence back at 20-year highs. This upbeat outlook is confirmed by leading economic indicators like the IHS Markit Purchasing Managers’ Index (PMI). The Composite PMI for the Euro Area now registers 59.2, the highest reading since June 2006, with strength evident in both manufacturing and services. Consumer confidence is also recovering rapidly. Employment is just two per cent below its pre-COVID peak with wages growing 2-3% p.a., markedly faster than the average wage growth realised over the past decade. Rising house prices are also helping, with double-digit price appreciation observed in a number of countries.
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/pefqtr_0621.pdfDecember, 2020
The Fund (C Class) returned 16.6% for the quarter and -5.0% over the year.
European equity markets rallied significantly over the quarter. The mood was initially grim, with investors anxious about rising COVID-19 infection rates. However, sentiment turned sharply following the announcement of Phase 3 trial results for BNT162b2, a leading COVID-19 vaccine candidate developed by BioNTech and Pfizer. This vaccine demonstrated 95% efficacy. While the data are only preliminary, the market had been expecting efficacy in the 70-75% range typical for flu vaccines. A very similar vaccine developed by US-based Moderna, reported almost identical efficacy soon after.
The availability of multiple, highly effective vaccines is crucial because no single vaccine can be produced in enough quantity to suppress the pandemic. While the COVID-19 ordeal is by no means over, the availability of highly effective vaccines significantly truncates the distribution of adverse outcomes. This is what markets are reacting so positively to. The Energy, Financials and Consumer Discretionary sectors led the market higher, while Healthcare and Consumer Staples lagged.
Export-facing sectors remain in favour, reflecting the strong economic recovery in China and the absence of a second wave of infections in that country. The best-performing stocks in the Fund over the quarter were banks (Bank of Ireland +109%, Banco Santander +55% from entry point during the quarter) and travel-related industrials (MTU Aero Engines +50%, Airbus +45%). Positions that detracted from the Fund’s performance were mostly healthcare stocks (MorphoSys -13%, Roche -2%) and internet stocks (ASOS -7%, Schibsted -11%).
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/pefqtr_1220.pdfasset_class: Foreign Equity
asset_category: Long Short
peer_benchmark: Foreign Equity - Long Short Index
broad_market_index: Developed -World Index
manager_contact_details: Array
ticker: PLA0001AU
release_schedule: Quarterly
commentary_block: Array
factsheet_url:
https://www.platinum.com.au/Our-Products/All-Products/Platinum-European-Fund
Updates & Reports
Quarterly Investment Manager’s Report
fund_features:
Platinum European Fund aims to provide capital growth over the long term by investing in undervalued companies in the European region. The Fund primarily invests in listed securities of European companies. European companies may list their securities on exchanges other than those in Europe and the Fund may invest in those securities. The Fund may invest in companies not listed in Europe but where their predominant business is conducted in Europe.
structure: Managed Fund