*** Plutos – Switzerland Fund Update *** Problem Children ***
In June 2024, the Plutos Switzerland Fund lost a large part of the gains from the previous month and closed a period marked by political influences with a decline of 5.18% - meanwhile, the SPI Small/Mid Cap Index declined by 1.6%.
A lot has happened in June, particularly in the political stage, which has put pressure in the European stock markets; European elections, new elections in France, EU import tariffs and the US election campaign have kept investors cautious. Unfortunately, these issues will be with us for a while. Despite the SNB's renewed interest rate cut, the EUR continues to be weak against the Swiss franc. This says a lot about the confidence in the EUR, which is of course also heavily influenced by the politics at the moment. Overall, the US and European markets tend to be diametrically different: despite the Fed's rather cautious statements, the US stock markets continued to power along.
Positive indications came from China, where the Caixin PMI did not slip into contraction territory but signaled healthy growth. China's exports and imports also rose in May compared to the previous year.
The highest increase in value in the following month was achieved by the Swiss transformer producer R&S Group - We are convinced that the shares have a lot more potential. The Roche GS are also doing well in the market, where the headlines are now consistently positive. The banking software market leader Temenos, which has announced a share buyback, the semi-supplier Comet, in whose wake the VAT Group, the Cembra Money Bank,AuchBelimo knew how to please.
The Kuehne + Nagel and Lonza Investor's focus appears to be somewhat categorized: at Kühne + Nagel, a reduction of tensions in the Middle East and the attacks by the Houthi rebels are viewed as negative factors for freight rates; however, at Lonza, the pressure on the shares has come from the potential delay in ratification of the "Biosecure Act," which may exclude certain "questionable" biotech suppliers.
Both companies are so well positioned in terms of quality that they do not need short-term drivers like these, let alone military conflicts, to be successful.
DocMorrissuffered from selling pressure due to an analyst rating. As well as medmix, which is one of our favorites for the second half of the year and 2025, are not yet in investor favor - the H124 publication on July 18 should provide more clarity here. Komaxand the Pierer Mobility AG had to release profit warnings in June, and the market responded appropriately, despite the fact that both equities had already approached the March 2020 Corona levels.
In the month under review, Plutos Switzerland Fund no new positions were entered into or sold entirely. After Aryzta, Accelleron, Lonzaand DocMorris suffered from profit-taking, we increased these stocks weightings.
“Patience is the trust that everything will happen when the time is right.”
Andreas Tenzer (*1954), German philosopher and educator
'Problem children'
In my writings, I repeat our 'playbook' almost like a mantra, which presupposes the following points: lower inflation rates, interest rate declines, growing purchasing managers' indexes, and an increasingly powerful China.
Many of the puzzle pieces are beginning to fit together:
- Inflation rates are declining in the United States, the Eurozone, China, and, of course, Switzerland, where there has rarely been an issue.
- The SNB and ECB have already cut interest rates in response to this situation; in the United States, every macroeconomic indicator (jobless claims, non-farm payrolls, PCE core price index, GDP, retail sales, consumer confidence, and many others) are still being analyzed to determine whether the Fed will raise interest rates soon or for a while. At the moment, the belief is that interest rates will be reduced twice this year, with additional steps taken in 2025. It seems vital to me to note that the US economy is still doing well, delaying an interest rate hike - while in Europe, we are still remaining at zero growth.
- The PMIs or Purchasing Managers' Indices are trending upwards - especially in Switzerland, China, the Eurozone - with the exception of Germany, our main trading partner. In the US they are rather stagnantly positive.
However, there are some positive indications in Germany: Month after month, the German mechanical and plant engineering group VDMA had to report weak industry order data. However, after a year and a half of consecutive negative rates, the orders are increasing again. In April, there was an actual increase of 10% over the previous year. Orders from within Germany increased by 3%, while orders from outside increased by 13%. Despite the fact that April this year had three more working days than in 2023, the association believes its "assumption confirmed that the bottom has been reached in incoming orders". The German construction industry recorded a 2,3% increase in real, calendar-adjusted incoming orders in April.
- As mentioned in the monthly report, the Caixin PMI provides positive news for the global economy as it has not slipped into contraction territory but instead signals healthy growth. Chinese visitors are starting to travel again and this trend will continue to increase, according to the World Travel & Tourism Council. "China's Tourists Splashing Cash Abroad to Exceed 2019 Frenzy".
China's exports and imports increased in May compared to a year earlier. According to customs data, overseas shipments increased by 7,6% year on year last month, while imports increased by 8,4% after growing by 1,8% the month before. A Reuters survey of economists predicted a 6,0% increase in exports and a 4,2% increase in imports. Economic indicators from recent months reveal that different areas of China's $18,6 trillion economy are returning at varying rates. The prolonged real estate crisis continues to be the most significant drag on the Chinese economy.
So, since many of our expectations are finally taking shape, why is the Plutos Switzerland Fund trading so volatilely, earning 5.4% in May and losing 5.2% in June?
Well, on one hand, this is due to the fund's relatively high beta, meaning it behaves more positively in a strong market and more weakly in a weaker market.
On the other hand, we have some problem children for whom the beginning of the cycle upswing has not yet arrived – which is still the case for most Swiss cyclicals, but for many of them the market is ready to see through to 2024.
Therefore, in this blog post I will specifically address our 'problem children':
ams OSRAM
Ams OSRAM had the most negative influence on fund performance, accounting for around 1.8% of the total, as it had the largest fund position at the start of the year.
ams OSRAM continues to suffer considerably as a result of Apple's surprise cancellation of the key microLED project, which appears to suggest that an essential growth area disappeared entirely. It is likely the last bubble to burst, which was inflated by the previous management. But the 40% reduction in share price is definitely perplexing to me - because there are still a number of questions to which we do not yet have the solutions. Will Apple provide compensation? Will ams OSRAM sell the Kulim factory, or will it find another customer? Samsung already sells microLEDs and manufactures them in Taiwan, albeit in small quantities and at exorbitant rates for the finished products.
I remain true to my statement in Finanz und Wirtschaft from February 2024: “For me, the share is still a clear buy, because AMS Osram could be the high-flyer in 2024,” albeit now from a lower basis.
GAM
After the successful Annual General Meeting in September 2023, at which the Board of Directors were re-staffed and thus the possibility of a turnaround, instead a sale to Liontrust was created, it is very quiet around the Global Asset Manager
Behind the scenes, work began immediately to bring GAM back to better times - the share price does not reflect this by any means, although the sector is seeing much higher-valued M&A. Of course, a lot of crockery has been broken in recent years, investor confidence is close to zero and the most important question remains whether GAM can stop the outflow of assets.
In addition, a capital increase is expected in July to convert Rock Investment's loan into stock. The market is talking about CHF 100 million, but according to my sources, Rock has only provided CHF 30 million so far. So, when individuals claim that no more cash will be available for GAM's future reorganization, I don't believe it's accurate. It is likely that the stock is being sold short in order to drive down the price of fresh shares.
GAM is not a short-term turnaround, but a multi-year project – with a negative performance contribution of 1.2%, however, our price is high in order to be able to participate in the price potential in the future.
Komax
The profit warning on June 18, 2024 from the market leader for wire processing solutions also surprised us and led to a negative performance contribution of 1.1%.
A difficult market environment, characterized by overcapacity and delays in customer projects, led to a significant decline in sales. Europe and Asia (with the exception of India) were described as particularly difficult. The structural need for automation remains intact for the wire processing industry and the projects are therefore mostly postponed.
For us, Komax's substantial market share, the continual drive from customers to automate, the intended increase in service share, and the low-cost valuation are all compelling reasons to stay involved.
With an EV/EBITDA of 7,4x 25E, the share is trading at a discount to the average of medium-sized Swiss industrial companies. The share has now reached the Corona levels of March 2020.
medmix
Although the position's negative performance contribution this year is approximately 1.1%, we will retain it. Medmix is positioned for rapid expansion, with a target of increasing sales by 2024-4% in 6 and maintaining an EBITDA margin of at least 20%. The Industry's major production location in Poland, which was to close in 2022, has been totally replaced by the new site in Valencia. Valencia has a large order backlog, but part of it needs to be confirmed. The decrease in inventories, particularly in the dental care sector, is believed to have begun in H124, and the order book is healthy.
The patent dispute won with Kettenbach/Xinial is likely to lead to replacement investments by customers, as they are no longer allowed to use the counterfeit, copied products. Another legal dispute in the USA is also likely to be settled in medmix's favor - with the same catch-up effects.
Medmix, meanwhile, is trading at around P/E 16x and an EV/EBITDA of 8.8x – values that are, in my opinion, significantly too low in historical comparison.
DocMorris
After DocMorris was our best investment in 2023, the position is costing around 1.1% in performance this year. I already commented extensively on DocMorris in the last blog (DocMorris – Once in a Lifetime) and tried to show the enormous opportunities. All that remains for me to say today is that the e-prescription cake is only being distributed once in Germany. DocMorris has the 'first mover' advantage and even if the analysts of a major Swiss bank see competition in the form of health insurance companies - which RedCare also considers unlikely - I remain positive about the further development of the company and, more importantly for the Plutos Switzerland Fund, the share price.
Meyer Burger
True to the motto ‘Who does not want it, already has it' Meyer Burger is continuing it's move to the USA and these days things are finally starting to sound a little more positive: the production of solar modules in Arizona has started and progress has also been made with the planned solar cell production. The Thun-based company is also aiming for a strategic partnership with an American technology group - negotiations are well advanced. Meyer Burger has also secured another purchase agreement with a major customer in the USA.
Meyer Burger currently remains the smallest position in the Plutos Switzerland Fund and so the negative performance contribution of 0.44% was rather manageable.
A little side note: Despite European politicians' failure to promote the local solar industry, which is now more reliant than ever on less efficient and unsustainable Chinese solar modules, the EU is imposing import duties on the land of the rising sun. How is the green energy transition expected to happen in this manner? In my opinion that is not intelligent. However, if renewables fail, Germany, for example, may simply build more coal-fired power plants to avoid using the evil nuclear power - despite the fact that the French, just across the border, are completely committed to nuclear power.
For me, this is definitely not sustainable, it's just confusing.
In summary, the 'problem children' indicated above damaged the fund's performance by roughly 6.8%. I believe my explanations are understandable and the values will recover. As a result, investing in the Plutos-Switzerland Fund appears worthwhile, particularly at this time.
Best regards,
Stephan
