The main Western markets closed March in positive territory after experiencing strong volatility throughout the month. The collapse of several regional banks in the United States, including Silicon Valley Bank, compounded by the subsequent failure of Credit Suisse, prompted uncertainty in the financial sector unseen since the Great Recession. However, the intervention of regulators partially dissipated that unease, the effects of which became evident in successive weeks as indices appreciated worldwide.
Early in the month, persistent inflation rates led investors to anticipate higher intervention rates from the central banks, which translated into rapid rises in sovereign interest rates. This changed the week SVB collapsed, and investors began contemplating a potential slowdown in the pace of interest-rate hikes.
The US economy remains strong, with Q1 GDP growth estimates exceeding +3.2%. The OECD also improved growth prospects for 2023. Retail sales delivered an upside surprise and non-agricultural job creation data beat expectations. PCE inflation in the US fell to 5% in February, while core inflation dipped to 4.6%. Both declines were deeper than anticipated. The Fed met expectations with a 25bp hike, though the tone of the subsequent announcement was more dovish, suggesting a scenario of less monetary tightening.
In Europe, data on industrial output and factory orders in Germany surprised on the upside with the accumulation of more orders than expected. Leading indicators, such as business and consumer confidence, continue to regain ground. Eurozone inflation fell to 6.9% in March, while the core rate reached 5.7%. The ECB raised interest rates again by 50bp with no comment on future hikes.
In Spain, the economy remains healthy, outpacing that of the US and the EU. The OECD and the Bank of Spain are revising growth expectations upward and expect inflation to ease in the coming quarters. With regard to the foreign sector, the balance sheet is positive, and services offset the trade balance of goods. Exports account for 42% of GDP and offset increased energy prices. In March, the EC delivered EUR 6 billion to Spain for the third Recovery Plan payment (EUR 37 billion already received). Inflation data for March was good, with headline inflation dropping from 6% to 3.3%, and its core counterpart declining to 7.5%. Energy prices also dropped, and supply chain tensions have eased, both positive factors in lowering inflation and maintaining economic growth.
In this climate, EDM Spanish Equity (L Class) obtained a return of +6% YTD, with the top contributors to the portfolio being Inditex, Gestamp, Tubacex, Lar España, and Vidrala.
In March, several companies in the portfolio released their 2022 results, continuing the positive trend from the previous month. Among others, the performance of Viscofan is worth noting. The company obtained its highest results ever in 2022, despite high energy costs. Its prospects are favourable: in a market of above-average growth, Viscofan outpaces market growth, while gaining market share. To capitalise on the rapid substitution of animal casings for artificial alternatives, the company has invested in new collagen capacity at five of its factories. Viscofan also presented favourable guidances through 2025 for both growth and profitability.
Cellnex published results that met expectations, with revenue growth of 38% (8% organic) and healthy operating cash generation. The company reiterated its commitment to deleverage the balance sheet and focus on organic growth. Its share price is considerably undervalued, making it a clear candidate for the portfolio as a potential target of a corporate transaction.
Inditex meanwhile, presented outstanding 2022 results. The fashion giant continues to demonstrate tremendous growth capacity—despite closures in the Russian market—with improvements in the group’s profitability and a proposed new phase of growth designed to capitalise on opportunities arising in areas where the company has low market share. 2023 began well, with 13.5% sales growth in the first few weeks of the year. These positive results become more significant when compared to the poor performance of the company’s peers.
The five main positions in the portfolio are Inditex, Gestamp, Grupo Catalana Occidente, Repsol, and Cie Automotive.
We remain confident in the companies included in the EDM Spanish Equity fund and we maintain that the portfolio, comprised of top-quality companies, will obtain excellent returns in the medium term. The current selection offers both growth and a very attractive valuation (in historical terms) with annual EPS growth near +10% CAGR, an average ROE of 15%, and a 12M P/E ratio of 9.9x. At current prices, we expect the fund to double its net worth in that period.
Ricardo Vidal,
Chief Investment Officer
