Platinum European Fund (PLA0001AU) Report & Performance

The Fund (C Class) finished the quarter on a strong note, rising 10.2% over the period.1 European markets continued to perform strongly, led by the Consumer Discretionary, Industrials and Information Technology sectors, as markets factored in slightly less negative business and consumer confidence. Financials, particularly European banks, had a very strong January and February but gave back some of their gains in March, following the bankruptcy of Silicon Valley Bank in the US and Credit Suisse’s forced merger with UBS.

Credit Suisse (not held in any of the Platinum funds) has had many highly publicised missteps in the last couple of years, but accelerating deposit outflows and counterparties curtailing risk required the Swiss bank supervisor and the Swiss National Bank (SNB) to orchestrate the merger to stabilise the bank and restore trust in the broader banking system. The cost of maintaining financial stability was borne not only by equity holders in Credit Suisse, which lost almost 90% of its value, but also by bondholders and Swiss taxpayers.2 While this is the first merger between two globally systemically important banks since the global financial crisis, thus carrying a significant execution risk, it will limit the spread of financial contagion.

On the other hand, the troubles of the US regional banks, such as Silicon Valley Bank and Signature Bank (see the Platinum International Fund report for further details), are more likely to have a significant impact on economic activity. Even before these events, there had already been a tightening in lending standards, both in the US and Europe.

Smaller US banks could adopt even more conservative lending standards in order to preserve liquidity, and these smaller banks, with less than US$250 billion in assets, account for a significant part of US commercial and industrial lending, residential real estate lending, commercial real estate lending and consumer lending.

The Fund (C Class) returned -1.9% for the quarter and -11.5% for the year. The economic situation in Europe is deteriorating. Most worryingly, consumer price infl ation accelerated to 8.1% per annum in May. This compares to a rate of under 2% a year ago. A silver lining is that underlying or ‘core’ infl ation (excluding food, energy, alcohol and tobacco) is lower in Europe (3.8%) than in the United States (6.0%). The implication is that this affords the European Central Bank the ability to tighten monetary conditions with less urgency and aggression than the US Federal Reserve. This will see less pressure applied to asset owners and large borrowers, namely governments. However, one key reason that core infl ation is lower in Europe is that wage growth is running at a comparatively pedestrian 2.7% per annum. While this may spare the region from more aggressive rate hikes, it puts ordinary households under signifi cant stress as their purchasing power erodes. Indeed, real household incomes are currently falling 5.4% per annum. Unsurprisingly, consumer sentiment has plummeted to levels only previously observed during times of crisis. For now, the unemployment rate remains low, by European standards, at 6.8%. This should be supported in the near term by business sentiment, which remains comparatively buoyant despite having pulled back from recent highs. However, these data are backward-looking. It is unrealistic to expect this situation to persist with a strained household sector, the war in Ukraine, ongoing supply-chain disruptions, rolling lockdowns in China, rising interest rates and potential energy shortages.

The Fund (C Class) returned -3.9% for the quarter.

European equity markets ended the quarter moderately lower. Higher-than-anticipated US infl ation data was released in September. In response, the US Federal Reserve (Fed) raised its expected path for interest rates to 4.5-5.0% by the end of 2023 and many other central banks echoed this anti-infl ation rhetoric. Investors are increasingly concerned that central banks will overreact, triggering a deeper-thannecessary recession. This ignited further appreciation in the US dollar and a sell-off in bonds and equities.

In late September, the Truss government delivered a minibudget which featured signifi cant tax cuts targeted at high-income earners in the UK. Wanton fi scal stimulus risks undermining efforts to control infl ation leading to even higher infl ation and interest rates. In this case, it may simply pile economic pain on average households while boosting discretionary income for the wealthy. The currency and bond markets were not amused, with longer-term interest rates spiking and the British pound collapsing to its lowest level against the US dollar since the Revolutionary War. For Europe, infl ation remains a key challenge. While infl ation rates are similar to those in the US, core infl ation is lower in Europe. Europe avoided the frenzied US fi scal spending that followed the COVID outbreak.

European infl ation is driven more by the depreciating euro and the decision to end reliance on Russian energy fuels. Thus, the outlook for infl ation and interest rates is more benign in Europe, although the disruption to energy supplies renders it more economically vulnerable in the near term. Unemployment remains very low in the euro area, with even youth unemployment at record lows. However, concerns around energy availability have devastated consumer confi dence, which is now well below its 2009 and 2020 lows. Consumers are battening down the hatches and holding back on spending. This is now being noted in companies’ earnings guidance.

The Fund (C Class) returned -11.3% for the quarter and -4.2% for the year.¹ It was a roller-coaster quarter threaded together by two distinct storms. For the first half of the quarter to mid-February, the market was concerned about rising inflation and higher interest rates, which resulted in expensive companies being sold off.

In our previous quarterly report, we mentioned that the ‘growth compounder’ companies trading on lofty valuations, such as Hermès International, represented high-risk propositions, in our view. Indeed, these stocks fell 20-30% early in the quarter, as it became evident that inflation was here to stay and both the European Central Bank (ECB) and the US Federal Reserve (Fed) were likely to tighten monetary policy faster and more aggressively than the market had priced in. As much as we recognised that some of these companies were quality businesses, their unfavourable risk/reward profile led us to a conscious decision to avoid owning them. Indeed, we opportunistically shorted a dozen or so of such excessively valued stocks and the Fund benefited from their recent derating.

The second half of the quarter was dominated by concerns over Russia’s invasion of Ukraine, the related sanctions and disruptions to global trade and money movement, and all the potential ramifications of these events. As at the outbreak of the war, the Platinum European Fund did not (and does not at the time of writing) hold positions in any company that is listed or predominantly operates in Russia or Ukraine. However, we were not entirely immune to the broad market sell-off triggered by the Russian invasion. Our holdings in travel companies, banks and other businesses with Central and Eastern European (CEE) exposures suffered the most, such as Wizz Air (-31%) and Raiffeisen Bank International (-50%). Allfunds Group (-40%), the Madrid-headquartered leading fund distribution platform with more than €1.3 trillion in assets under distribution, was another detractor due to its exposure to softer equity and bond markets and a weaker-than-expected quarterly result.

The Fund (C Class) returned 6.2% for the quarter and 26.2% for the year.

Business sentiment is rebounding throughout Europe, with surveys of business confidence back at 20-year highs. This upbeat outlook is confirmed by leading economic indicators like the IHS Markit Purchasing Managers’ Index (PMI). The Composite PMI for the Euro Area now registers 59.2, the highest reading since June 2006, with strength evident in both manufacturing and services. Consumer confidence is also recovering rapidly. Employment is just two per cent below its pre-COVID peak with wages growing 2-3% p.a., markedly faster than the average wage growth realised over the past decade. Rising house prices are also helping, with double-digit price appreciation observed in a number of countries.

The Fund (C Class) returned 16.6% for the quarter and -5.0% over the year.

European equity markets rallied significantly over the quarter. The mood was initially grim, with investors anxious about rising COVID-19 infection rates. However, sentiment turned sharply following the announcement of Phase 3 trial results for BNT162b2, a leading COVID-19 vaccine candidate developed by BioNTech and Pfizer. This vaccine demonstrated 95% efficacy. While the data are only preliminary, the market had been expecting efficacy in the 70-75% range typical for flu vaccines. A very similar vaccine developed by US-based Moderna, reported almost identical efficacy soon after.

The availability of multiple, highly effective vaccines is crucial because no single vaccine can be produced in enough quantity to suppress the pandemic. While the COVID-19 ordeal is by no means over, the availability of highly effective vaccines significantly truncates the distribution of adverse outcomes. This is what markets are reacting so positively to. The Energy, Financials and Consumer Discretionary sectors led the market higher, while Healthcare and Consumer Staples lagged.

Export-facing sectors remain in favour, reflecting the strong economic recovery in China and the absence of a second wave of infections in that country. The best-performing stocks in the Fund over the quarter were banks (Bank of Ireland +109%, Banco Santander +55% from entry point during the quarter) and travel-related industrials (MTU Aero Engines +50%, Airbus +45%). Positions that detracted from the Fund’s performance were mostly healthcare stocks (MorphoSys -13%, Roche -2%) and internet stocks (ASOS -7%, Schibsted -11%).