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Monthly Report 01/2024

By February 7, 2024No Comments

The KEN European Growth Champions Fund ended January with a performance of -6.84%. The average net exposure was 61.64%. The long portfolio lost -7.52%, while the short side contributed +1.09%.

Market Review: In January, the interest rate pendulum swung in the opposite direction. Federal Reserve Chairman Powell tempered expectations regarding an interest rate cut in March. However, he also pointed to the positive development of inflation, which sustained hope for an interest rate cut. Additionally, concerns about a too pronounced economic slowdown resurfaced in Europe. The price of Brent crude oil increased in January to USD 80.55.

Portfolio Review: In early January, we began the year with a short exposure of just over 42%. On one hand, we reduced the long exposure to 89% and increased the short exposure to nearly 50%. As mentioned in the last December factsheet, the “higher-for-longer” theme gained popularity, indicating that potential interest rate cuts were priced in prematurely. This trend continued into January, and we found ourselves incorrectly positioned. Consumer values declined significantly, with positions such as Adidas, Zalando, or Puma contributing to substantial losses in our portfolio. Puma, which had already fallen by 10.90% last year, lost an additional approximately 25% after issuing a profit warning for 2024. Adidas also warned of analyst estimates being too high for the current year, resulting in a 9% drop in one day. The management has now projected EUR 500 million for EBIT in 2024, a figure that compares weakly with the expected EUR 1.27 billion. Shortly thereafter, the stock recovered from the decline. Adidas had already drastically lowered investor expectations in 2023, only to surpass them each quarter: a lesson in managing expectations for management. Nike and Puma followed Adidas’s lead, presenting similarly low expectations this time. Adidas emphasized in the conference call that their guidance is very conservative. We hope that the sector will actually fare better soon than has been communicated for a long time. Given the low valuations, especially for Puma, but also for Zalando, and considering the strong economic data – a stable job market, rising wages combined with decreasing inflation – we remain optimistic about the sportswear manufacturer and the online clothing company, which are trading near their historical lows. A broad recovery is overdue for a potential re-rating. Porsche, Hensoldt, and easyJet were among our winners this month. EasyJet provided convincing guidance for 2024 and already sees strong bookings for the summer. Porsche’s stock price has nearly halved since its listing two years ago, and we believe the chances outweigh the risks from the Macan production stop in spring and the ongoing weak demand in China, topics that have been discussed for a considerable time. Strong order books, especially in Europe and the USA, should compensate for these challenges.

Investment Decisions: We have slightly increased our positions in Zalando and Puma, as we consider the negative price development to be exaggerated. Puma and Zalando are currently trading at a historically low EV/EBITDA ratio of around 6x, compared to a 10-year average of 13x for Puma and 28x for Zalando. Additionally, we have initiated an initial position in Porsche.

Outlook: We continue to believe that interest rates in Europe and the USA have reached their peak. Federal Reserve Chairman Jerome Powell has announced and confirmed at least three interest rate cuts in the USA for the year 2024. Companies report a demand weakness, which has been discussed in the capital market for one and a half to two years, depending on the sector, and has often led to prolonged devaluation. The stock price developments of some stocks raise skepticism among investors. This skepticism is justified in many cases, but not in all. Patience is advised.