Carmignac Absolute Return Europe

After a particularly weak start to the month for equity markets, interest rate cuts from the Fed and ECB along with a significant surprise stimulus package in China catalysed a sharp rally leaving the Stoxx 600 with a monthly return of -0.4%.

The month was marked by volatility, reversing August's trends as the US outperformed Europe and cyclicals outpaced defensives.

It was a rotational period characterized by profit-taking in year-to-date winners, aggressive short covering, and increased buying of laggards.

September saw a pickup in large cap M&A with DSV acquiring Schenker and UniCredit stake building in Commerzbank.

Within Europe the best sectors were Basic Resources, Leisure and Retail while the main laggards were Healthcare, Autos and Energy.

We entered September with a relatively low risk and defensive portfolio.

Our long book made a positive return, but this was more than offset by a negative return from our stock shorts and portfolio hedging due to the strength of the rotational rally towards the end of the month leaving the fund down for September

Positive contributions were made in Communications, Technology, Real Estate, Utilities and Financials while the main detractors came from Healthcare , Energy and Consumer Discretionary

The key winners from stock selection were our Longs in Technology names. Micron outperformed expectations with an earnings beat and raised full-year guidance, while Meta benefited from growing confidence in its AI leadership.

We can also mention our long position in Nexans, which secured a key contract for underwater cables, and our short position in a Swedish consumer company that issued a profit warning.

The most significant underperformers from our stock selection were our long positions in Novo Nordisk, which faced profit-taking due to concerns about potential competition in GLP-1 drugs, and ASML, which was impacted by doubts regarding the sustainability of semiconductor capital expenditure.

In the Healthcare sector, further detractors included our long position in Demant, which was negatively affected by ongoing concerns about short-term Q3 expectations, and AstraZeneca, which suffered after disappointing results from a drug trial.

Faced with negative market conditions in the first few days of the month we rapidly moved into capital protection mode to minimize risk of losses.

Our gross exposure was reduced to around 100% from 120% and within the portfolio structure we reduced Technology, cyclicals and financials and added to defensive names in Staples, Communications and Real Estate.

With markets at the lows, we took advantage of selective opportunities to pick up oversold quality names such as Schneider which worked well.

With no earnings reports, the market will be mostly focused on macro and political (US election) news, usually a cause for added uncertainty and volatility.

Therefore, all eyes on this week’s employment numbers (NFP). A weak print, with rising unemployment, would fuel the hard landing / recession scenario, whereby even a more aggressive Fed cut, is unlikely to be supportive to the markets, putting more pressure on Cyclicals to underperform Defensive sectors.

If however, we do see a good NFP number (unemployment not rising), there will be a sign of relief from the market (especially from these lower starting levels), as good employment levels no longer equate to higher inflation.

Also, we are soon upon the US elections. History suggests, especially if it’s a tight race between the 2 presidential candidates, that some 4-6 weeks before the election, markets tend to be weak, selling off between 3-5% on average.

Therefore, considering all these data points, uncertainties, coupled with it already being a seasonally weaker period for markets, we continue to run with reduced risk, lower gross and net so that we have plenty of ‘ammunition’ to step in again and scale up our highest conviction ideas once there is a clearer picture.