Artemis European Sustainable Growth Fund update

In Q3 the fund’s NAV has declined by 1.0% compared to a 1.6% decline in the FTSE Europe ex-UK index.

Our top three contributors were Novo Nordisk, Universal Music Group and Munich RE. Our top three detractors were Dino Polska, Amadeus and Straumann.

Key developments impacting markets and the fund in the quarter were as follows:

Economic 'soft landing' – inflation surprises have turned negative and leading indicators suggest a sharp deceleration in both core and headline inflation across developed markets. This combined with robust employment markets has led to positive GDP revisions in the US and a belief that inflation can be brought down to target without triggering recession (a 'soft landing')

Rate cycle peak/rising bond yields – long-term bond yields have continued to rise despite expectations that central bankers are reaching the end of the hiking cycle. A higher 'term premium' for bonds is likely to be a function of reduced support from central banks in the bond market and concerns over the sustainability of sovereign debt

China’s economic recovery – has been disappointing due to a sluggish re-opening of the economy (e.g. visa approvals still constrained) and self-imposed measures to hold back speculative housing development

Q2 corporate earnings – were strong across Europe with the ratio of positive surprises outweighing misses by nearly 2 to 1. Commodities and chemicals were the only two sectors with negative EPS revisions. The Stoxx Europe 600 index is forecast to grow aggregate earnings per share (ex-energy) by 4% in 2023 and 9% in 2024

Equity markets traded sideways for much of the quarter with a sell-off towards the end triggered by the continued rise in bond yields. Sector performance was broadly consistent with macroeconomic developments as industries with longer-duration characteristics were weak (technology, utilities, staples) and shorter-duration or 'value' sectors (financials/energy) were strong.

D'Ieteren and ASML

We bought D’Ieteren, a Belgian holding company whose primary asset is Belron, a global leader in vehicle glass repair and replacement. The company’s UK business, Autoglass, is a household name. Belron has seen an extraordinary turnaround in its operating performance since 2018 following an investment by private equity.

We purchased ASML following a fall in its share price. While some of the enthusiasm around AI has waned recently, our judgement is that its impact will be profound and will support semiconductor capital expenditure growth.

Irish and UK Housebuilders

The fund started positions in two housebuilders based on a view that interest rate volatility and weak consumer confidence has obscured housebuilders ability to generate cash, underpinned by an undersupply of housing in both the UK and Ireland.

Cairn Homes is the largest housebuilder in Ireland, set to build 1,800 homes in 2024 and with a land bank of 16,000 units equating to over nine years of supply. Unlike in many other markets, the demand environment in Ireland is very positive. The government is running a budget surplus that has enabled it to subsidise home purchases with a “help to buy” scheme. The banking system has excess deposits, and so the mortgage shock has been lower than in other economies. Mortgage rates have risen from 2% to 4%, hence buying remains more compelling than renting.

Barratt Developments is the largest housebuilder in the UK, building 17,000 homes in the year ending June 2023. The company has an 70,000 plot land bank. In addition to land holdings of £2.6bn, the company has £1bn of net cash. The UK has suffered from a persistent under provision of new housing. Housing completions have consistently run at c.150,000 per annum, below household additions of over 200,000 meaning that there is an accumulated deficit of more than 1m homes.

Novo Nordisk

Novo Nordisk was one of the fund’s strongest contributors in the quarter and remains its largest position. Novo is unique in being a large pharmaceutical company that has long been biology-driven with a focus on conditions relating to the pancreas, brain, heart and liver, notably diabetes and more recently, obesity. Novo was the first to commercialise the production of insulin in 1923. The outlook for the company has changed significantly in recent years due to the development of 'GLP-1s' that are used for the treatment of obesity.

The reason for Novo’s recent strong share price performance was the positive result of a trial that monitored the impact of its GLP-1 semaglutide over five years. Results showed that the drug reduces the risk of major adverse cardiovascular events by 20%, in addition to its benefits in weight loss. As US drugs are priced and reimbursed on a “value for money” basis, this combination should significantly improve the scope for GLP-1s to be used in the US.