Equity markets closed the first half of 2023 very favourably, beating economic forecasts from the beginning of the year, despite a tightening of credit conditions globally. Results were widely dispersed both by geography and by sector, with the tech industry as the top performer, driven by optimism about developments in artificial intelligence.
In the US, the economy continues to show signs of strength, as the risk of falling into a recession this year recedes. Business confidence data among construction companies is picking up, despite being one of the sectors heaviest hit by rate hikes. Housing starts, building permits, and consumer confidence are also up. Worth noting are the positive results in Q1 GDP, with very healthy spending and good employment figures. Inflation has eased more than expected and currently stands at 4%, thanks to the energy component. Core inflation also fell, to 5.3%. The FED kept interest rates unchanged and may be nearing a sufficient degree of monetary tightening. Powel indicated that he does not foresee any decreases this year.
In Europe, economic prospects are improving for the year. The job market remains robust and aggregate demand maintains its good fundamentals (favourable fiscal policy, decline of raw materials, rising wages, etc.). In addition, inflation shows signs of easing, falling to the lowest level in the last 18 months. For its part, the ECB increased interest rates by 25bps to 4% in June for the main refinancing operations. The market expects the Central Bank will continue to raise rates—by at least 25 or 50bps—in the coming months.
In Spain, economic activity remains strong. In June, the Bank of Spain, the OECD, and the Fitch rating agency raised their 2023 GDP forecasts on higher growth in external demand and INE revisions. Retail sales are accelerating, and consumer confidence continues to improve. The labour market and job creation remain positive, with social security registration exceeding 20.8 million and unemployment dropping to 2.7 million (the lowest figure since September 2008). All sectors are creating jobs, especially hospitality, as it prepares for a record-breaking summer. Prices eased once again, with inflation dipping to 1.9%, already consistent with ECB targets. The core rate dropped 0.2 to 5.9%.
In this context, EDM Spanish Equity (L Class) obtained a return of +12.1%, with the top contributors to the portfolio being Inditex, Applus, Tubacex, OPDEnergy, and Gestamp.
This month we highlight Inditex, which posted excellent Q1 results that easily beat consensus estimates. The company is experiencing double-digit growth across all income statement line items, obtaining an EBIT margin of 19.5% and expanding its net cash position to EUR 10bn. These results are the upshot of investments made in recent years focused on optimising brink-and-mortar stores, technology, logistics, and the seamless integration of its physical/online store model.
The month was also characterised by an acceleration of corporate movements and acquisitions of listed assets by private funds. In our opinion, the increase in corporate actions is mainly attributable to i) attractive valuations for a certain type of asset, and ii) better visibility about the future evolution of interest rates. In the case of our portfolio, two companies received takeover bids in June: OPDEnergy and Applus. In addition, thus far in 2023, Allfunds received an indicative offer from Euronext (ultimately withdrawn by the buyer) and rumours swirled about potential interest in Cellnex from Brookfield and American Tower.
OPDEnergy, for its part, received a takeover bid from Antin, an infrastructure fund, for EUR 866m (EUR 5.85/share). This valuation implies a premium of 46% over the previous day’s price and 23% over the IPO we attended. The share has appreciated 48% so far this year.
Applus, meanwhile, received a takeover bid from Apollo for EUR 9.50/share, representing a premium of 14% over the average price of the last three months and 30% over the share price days before the press leaked a story about three different investment funds interested in acquiring the company. The share has appreciated 54% so far this year.
The five main positions in the portfolio are Inditex, Gestamp, Grupo Catalana Occidente, Repsol, and Tubacex.
We maintain that there is a clear investment opportunity in quality companies, such as those that comprise the EDM Spanish Equity portfolio. The fund embarks on the second half of 2023 with a very attractive selection of securities in terms of quality and valuation. EDM Spanish Equity trades at an unjustifiable 12M P/E ratio of 10x with an average ROE of 16%. Based on current prices and our profit growth estimates for the portfolio as a whole (nearly +10% CAGR), we expect the fund could double its net worth in five years.
Ricardo Vidal,
Chief Investment Officer
