In April, mistrust returned to markets. Uncertainty about the short term escalated due to the accumulation of risks crowding the environment: inflation, interest-rate hikes, geopolitical conflict, increased energy independence in Europe, etc.
Growing inflationary pressures continued to attract attention in April, with headline inflation reaching very high levels. In the US, which is further ahead in the cycle, inflation—currently at a 40-year high—appears to be near peaking. This continues to put pressure on central banks, faced with the challenge of curbing rising inflation without triggering a recession, in other words, a soft landing.
Meanwhile China’s zero-COVID policy could take its toll on global economic growth. The restrictions in Shanghai (the main global logistics and production hub) should be relaxed in the coming weeks. Although the IMF lowered growth expectations for 2022, they remain high: at +3.3% for developed economies.
In the US, economic activity remains dynamic. High activity rates persist for both the labour market and industrial output. Confidence has deteriorated somewhat, but both domestic spending and foreign trade continue to be strong.
In Europe, rising inflation is caused primarily by energy prices, which are beginning to ease. There is positive news from the job market (with very healthy rates after the COVID crisis) and in the sharp recovery of the tourism sector.
Spain will once again lead economic growth among developed economies. According to the IMF, Spain will see +4.8% GDP growth in 2022. Household spending and business investment continue to be the main pillars of growth. Sectors linked to tourism will also notice a strong upturn in demand. The recovery of employment and a slight increase in wages will offset some of the purchasing power lost due to the rise in inflation.
In this environment, EDM Spanish Equity Retail Class gained +0.95% (+1.02% for the L Class) in April. In YTD terms, the fund (R Class) has yielded -7.96% (-7.66% for the L Class), underperforming in comparison to the Ibex 35. In our view, the market does not reflect the excellent fundamentals of our companies. We anticipate that we are achieving a high alpha in early May once the portfolio companies started reporting positive results from the first quarter of the year.
It is worth highlighting the results of Cie Automotive. The company achieved record highs in sales, Ebitda, net profit, and cash generation. It obtained revenue growth of +11%, while the automotive sector declined -4.5%. For the first time in a single quarter, the company obtained €80 million in net profit, representing +5.1% growth. It maintains all of its 2025 objectives unchanged.
Catalana Occidente posted revenue growth of +8.5%, in both traditional and credit insurance, based on the growth of premiums. The company succeeded in improving the combined ratio of its traditional business, despite the logical worsening of the CR for autos and maintaining a minimal CR in credit, given a low accident rate. Attributable profit rose 19.8% to €132.4M and the solvency ratio stands at 220%. The share trades at a P/E ratio of 7.5x with a dividend yield of 3.8%, estimating high upside potential.
Befesa published sales growth of +36% and a net profit of +9%. It also announced a range of guidances with double-digit growth expected for 2022. It is the first quarter of operations in China, with positive results and some impact due to COVID restrictions. Regarding the acquisition of AZR in the US, operationally it has gone better than expected and the company maintains its goal of synergies.
For its part, Repsol obtained strong quarterly results, with a rebound in profit relative to the previous year due to i) rising oil and gas prices, which reached their highest level since 2008, and ii) the post-COVID recovery. The group’s adjusted net result, which specifically measures the evolution of the businesses, totalled €1.056 billion (+124% compared to 2021), due to the performance of the Exploration and Production area, which contributed 69% of the result. Operating cash flow stood at €1.091 billion (+6%), which is reflected in an improvement in shareholder remuneration through the extension of a share buyback programme and the proposal to increase the dividend by 5%.
The top contributors to the portfolio in April were Repsol, Prosegur Cash, Tubacex, Coca-Cola Europacific Partners, and Lar España, while the main detractors were Befesa, Allfunds, and Grifols.
We may be facing an historic opportunity to invest in EDM Spanish Equity Fund; a portfolio of top quality companies at unjustifiably low prices (trading at a 2022 P/E ratio of 11.8x and a 2023 P/E ratio of 10.3x vs. an historical average of 14.5x). The fund represents a combination of companies with international scope, with only one-third of sales originating from the local market (Spain), and protection from inflationary environments owing to pricing power. It is also worth noting that Spain is expected to grow nearly 5% and is a major recipient of EU Next Generation Funds (€70 billion, approximately 7% of GDP). At current prices and considering our average annual profit growth estimate for the next five years (+13% per year), we expect the fund to double its current asset value in that period.
Ricardo Vidal,
Chief Investment Officer
