Carmignac

Carmignac European Long Short Equity: Letter from the Fund Manager

  • Author(s)
    Malte Heininger
  • Published
  • Length
    6 minute(s) read

Dear Investors,

Q2 2023 was a challenging quarter for us, as the macro environment remained complex and confusing. As detailed in our last quarterly letter, the economy is still heavily impacted by the direct and indirect impacts of the Covid period, which brought the global economy out of balance and led to a broad dis-synchronization of the cycle.
Our fund** generated a performance of  -0.93%, net of fees, during the quarter.
As seen in the table below, while our Core Long book generated a positive performance, driven by our large convictions in Alcon, Prada and Microsoft; our Alpha Shorts suffered from the Beta and Momentum driven market rally.

YTD attribution by bucket

Core Longs+3.61
Trading Longs-0.05
Relative value/Special sit-0.03
Alpha Shorts-3.57
Hedging-3.12


                                                                Data as of 30/06/2023. Source: Carmignac, 30/06/2023

During the second quarter, European Equity markets were broadly flat, and range bound after a strong rally in Q1, while the US equity market continued to recover.

Looking at the fundamentals, that divergence between the US and Europe makes sense.
The US economy is holding up well and the data is coming in better than expected, defying the predictions for a near term recession.
The strength of the US economy, among others, is still benefiting from the huge amount of stimulus from the trillions of newly printed money, which was provided during Covid. The monetary policy effort to mop that liquidity up again, via a quantitative tightening and higher interest rates, were so far fully offset by the hugely expansive fiscal policy of the US government, in the form of the Inflation Reduction Act (IRA), the US Infrastructure Act, the Chips Act etc.
The US budget deficit for 2023 lies at 8%, an incredibly high number, outside of crisis & war times, at a time when unemployment is below 4%. On the other hand, the US consumer became much less interest rate sensitive, as over 90% of residential mortgages, which account for 80% of consumer debt, are mostly very long dated and fixed.
Early cyclical markets, like the housing and the overall real estate industry, with large ripple effect to the broader economy, are holding up fairly well thanks to:

  • Commercial construction, which has been propped up by the IRA and re-shoring

  • Residential newbuild market is counter-intuitively helped by the higher rates that reduce the amount of second-hand homes supply as people cannot refinance, hence improving the demand for new build houses

While inflation is coming down and the labour market remains fairly tight, real wages have started to rise.
Beyond this, we also see early indicators in the US, like the ISM inventory to new orders ratio potentially troughing, which could be the beginning of a restocking cycle.
If we look to summarize, the US economy is looking fairly good and although the earnings and multiples might reflect that, there are no imminent signs that the economy will be falling off a cliff.

Jumping over to Europe, the picture is different for many reasons.
Going back to Covid, we never had the amount of monetary and fiscal stimulus that the US had. Coming out of Covid, we have nothing like the US fiscal stimulus packages (IRA, Infrastructure, etc) that boosts the economy. And given we never had the stimulus, the origins of the inflation in Europe were mainly coming from the energy crisis and Covid-related supply chain disruptions, rather than excessive money printing. While we did not have the stimulus benefit, we had a similar amount of monetary tightening in the form of unprecedented interest rate hikes to fight the inflation shock that, especially in markets with mainly floating or short dated mortgages like Sweden or the UK, have a much larger impact on the real estate market than in the US. For example, German house prices fell faster this year than during the financial crisis and the construction industry is facing a huge cliff with new projects collapsing.

The hope from earlier this year of a roaring come-back of China that would boost European exports did not materialize and the Chinese economy continues to be very weak. The structural issues Europe has, are obviously still very much present, and while the arrival of artificial intelligence (AI) is a historical change which will have huge implications for all companies, the engines of this development are, with some exceptions, once again in the US and will further widen the structural gap between the continents.

European markets are at their highs after a strong first semester and many companies are still benefiting from the inflationary environment and the slower than anticipated normalization of supply chain issues. The strong inventory cycle in 2022 is now coming to an end and, while inventory accumulation boosted growth last year, it is likely to be a significant drag in 2023. European business inventories have increased substantially over the past couple of years, pushing inventory-to-sales ratios across sectors close to 20-year highs. Since the onset of Covid, these companies boosted their P&L thanks to these artificial supply shortages and pricing power. High-cost inventories are at risk from a demand slowdown as pricing power cannot be sustained, thus impacting margins and bottom-line profitability. More recently, we have started noticing the first cracks.

Chemicals, an early cyclical industry which, by nature, does not have a backlog and is not benefiting any longer from artificial shortages, provides us with a real snapshot of the current economy. This sector has seen an avalanche of profit warnings this year across end markets (BASF, Clariant, Croda, DSM or Lanxess among others), due to a mix of high inventory levels/de-stocking and weak end demand. Other industries are still more insulated from this development due to their extended backlogs, but the underlying set-up is a similar one, with high inventories across the supply chain and weak end demand. Therefore, unless there is a big rebound in economic growth, many companies will be hit in the months to come.
While equity markets are currently still excited about inflation coming down, the impact for companies will be weak pricing on weak volumes. Here again, we are starting to see that coming through, in various industries (e.g., players in the US food staples like General Mills or Campbell Soup, where the positive pricing tailwind has started to fade, while volumes are still weak).

  • In summary, the macroeconomic outlook is still complex, with a fairly strong, fiscally stimulated and AI boosted US market, a weak Chinese Economy with political tail risks and a European economy that is rolling over. From a pure fundamental investment point of view, it feels like many of the Covid-related dislocations, which distorted company financials and business economics, are starting to normalize again, which will benefit fundamental investment strategies.

    As always, our focus remains on company specifics and bottom-up investment cases and we are very excited about the opportunities ahead of us.

Wishing you a great Summer!

The European Long/Short Equity Team

Source: Carmignac, Bloomberg, 30/06/2023. ** Performance of the F EUR Acc share class ISIN code: LU0992627298.
Past performance is not necessarily indicative of future performance.

Carmignac Portfolio Long-Short European Equities

A flexible Long/Short approach to European Equities

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Carmignac Portfolio Long-Short European Equities F EUR Acc

ISIN: LU0992627298

Recommended minimum investment horizon

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1 2 3 4 5 6 7
Main risk of the Fund

RISK ASSOCIATED WITH THE LONG/SHORT STRATEGY: This risk is linked to long and/or short positions designed to adjust net market exposure. The fund may suffer high losses if its long and short positions undergo simultaneous unfavourable development in opposite directions.

EQUITY: The Fund may be affected by stock price variations, the scale of which is dependent on external factors, stock trading volumes or market capitalization.

INTEREST RATE: Interest rate risk results in a decline in the net asset value in the event of changes in interest rates.

CURRENCY: Currency risk is linked to exposure to a currency other than the Fund’s valuation currency, either through direct investment or the use of forward financial instruments.

The Fund presents a risk of loss of capital.

* Risk Scale from the KID (Key Information Document). Risk 1 does not mean a risk-free investment. This indicator may change over time.

Carmignac Portfolio Long-Short European Equities F EUR Acc

ISIN: LU0992627298
2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 (YTD)
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Year to date
Carmignac Portfolio Long-Short European Equities F EUR Acc +2.34 % -7.67 % +9.99 % +16.73 % +5.15 % +0.32 % +7.42 % +13.57 % -5.72 % +0.72 % +3.21 %

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3 Years 5 Years 10 Years
Carmignac Portfolio Long-Short European Equities F EUR Acc +4.50 % +4.05 % +4.55 %

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​Past performance is not necessarily indicative of future performance. Performances are net of fees (excluding possible entrance fees charged by the distributor).

Source : Carmignac at .

Entry costs : 4,00% of the amount you pay in when entering this investment. This is the most you will be charged. Carmignac Gestion doesn't charge any entry fee. The person selling you the product will inform you of the actual charge.
Exit costs : We do not charge an exit fee for this product.
Management fees and other administrative or operating costs : 1,46% of the value of your investment per year. This estimate is based on actual costs over the past year.
Performance fees : 20,00% max. of the outperformance if the performance is positive and the net asset value exceeds the high-water mark. The actual amount will vary depending on how well your investment performs. The aggregated cost estimation above includes the average over the last 5 years, or since the product creation if it is less than 5 years.
Transaction Cost : 1,04% of the value of your investment per year. This is an estimate of the costs incurred when we buy and sell the investments underlying the product. The actual amount varies depending on the quantity we buy and sell.
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