August was a month of financial market fluctuations. Initially we saw a continuation of July’s optimism and valuation gains, but investor sentiment shifted in the second half of the month on tougher rhetoric from the central banks and both bonds and equities fell sharply.
In the US, healthy employment figures and the publication of lower-than-expected inflation data led investors to suspect the Fed may not have to raise interest rates so aggressively, but the remarks of Fed Chairman Jerome Powell in Jackson Hole once again prompted a change in forecasts toward a more restrictive monetary policy.
In Europe, the shift toward a more restrictive monetary policy became increasingly evident following the publication of preliminary inflation data of 9.1%. The market responded with further hikes in sovereign interest rates. We maintain a more optimistic view, given that the Eurozone continues to benefit from historically low unemployment levels, ample savings, and an underleveraged private sector. Furthermore, its growth may outpace that of the US thanks to contributions from the Next Generation Fund.
Among developed countries, Spain will continue to lead economic growth. Tourism has rebounded sharply, as demonstrated by the influx of foreign tourists in July, which exceeded expectations. We also saw better industrial output figures in August. Moreover, inflation appears to have peaked and began slowing in July.
Over the course of the month, there was little corporate news and minimal trading volumes. The results published in late July were good overall and the market acknowledged as much in the first weeks of August. Then, once again, news of future rate hikes to combat high inflation re-emerged. Regardless, our portfolio is comprised of top quality, highly diversified companies, which should be able to weather any economic slowdown, as they have in the past.
With regard to results, Coca-Cola Europacific Partners posted its figures in August. The company saw very good results for H1’22, prompting a second upward revision of 2022 guidances. It managed to offset inflationary pressure on costs with an increase in volume, price hikes, and an improvement in the mix. It is worth noting the upswing of the Horeca (HOtels, REstaurants, CAfes) channel, especially in southern Europe, owing to the recovery of tourism. The second half of the year has begun well, with no indication of declining volumes. Current prices translate to an FCF yield of 6.6%. It trades at a 2022 P/E ratio of 15.2x and offers a dividend yield of 3.2%.
The top contributors to the portfolio in August were Repsol, Tubacex, Miquel y Costas, and Catalana Occidente, while the main detractors were Inditex, Grifols, and Fluidra.
In YTD terms, the top contributors to the fund’s profitability are Repsol, Tubacex, Logista, and Prosegur Cash, while the main detractors are Fluidra, Befesa, Rovi, and CAF.
In August, there were no relevant movements in the portfolio, where the five main positions are Grupo Catalana Occidente, Gestamp, CAF, Repsol, and Inditex.
In our opinion, recent corrections (YTD: -11.6%) serve as an excellent opportunity to invest in a fund like EDM Spanish Equity. We continue to trust in the good performance of the companies in our portfolio. The fund faces the 2022 year-end with a very attractive selection of securities in terms of quality and valuation. It trades at an unwarranted 2023 P/E ratio of just 9.8x. Based on current prices and our profit growth estimate for the portfolio as a whole (+14% annually), we expect the fund to double its net-worth in five years.
Ricardo Vidal,
Chief Investment Officer
