Carmignac Absolute Return Europe

January saw a positive start to 2025 with equities and bonds delivering positive returns.

However, along the way there were two major road bumps, Trump tariff headlines & emergence of Chinese artificial intelligence company DeepSeek, both events causing spikes in volatility and the latter more importantly triggering a significant sell off in AI related stocks. Most notably, it caused the largest one-day loss of market capitalization for a single stock (Nvidia) ever.

European equities outperformed US equities, breaking a multi-year trend of European underperformance. This development aligned closely with our predictions and commentary in our quarterly outlook.

Growth stocks outperformed value and cyclicals outperformed defensives.

All sectors in Europe were up with leadership from Consumer Products, Financials, Industrials, Technology and Healthcare while utilities, and staples were the laggards.

The fund produced a positive return for January.

The main positive contributors came from stock selection in Financials, Industrials, Communications and Healthcare. In a buoyant market where every single sector was up the main detractors came from individual stock shorts and our futures and options portfolio hedging program.

Key stock selection winners included long positions in Deutsche Telekom, driven by expectations of a positive Q4 earnings report; SAP, which not only reported an earnings beat but also raised its guidance for 2025; and Meta, which demonstrated strong confidence in its AI positioning, supported by robust financial performance.

The main laggards from stock selection were our long positions in Broadcom, which were negatively affected by the Deepseek AI sell-off, a short position in Consumer Staples that suffered due to a market squeeze, and a short position in a Luxury stock that underperformed after its peer, Richemont, reported better-than-expected results.

In January we took the decision to increase our gross exposure having reduced it into the more uncertain and higher volatility market we anticipated into the end of 2024.

We took our gross exposure from around 100%, to closer to 130%, and selectively added risk, mainly in Europe, seeing our net exposure steadily drifting from 20% to mid 20’s%. As part of this process, we increased exposure to Financials, Communications and Consumer Discretionary.

At the single stock level we initiated new longs in media company Informa, a Swiss building materials company Sika and Sandoz, a biosimilar drug manufacturer.

As we write this, early Feb, we are approaching the mid-point of the ongoing FY24 reporting season. Given market volatility, we aim to take risks only where there is a favorable risk-reward ratio and hedge outsized positions ahead of results. Our primary focus remains on corporates for the next 2-3 weeks.

Macro and political factors continue to dominate headlines, with central bank risks appearing to have diminished as market expectations around rate cuts have reset. In the EU, anticipated rate cuts and economic sensitivity to these cuts are key factors. Additionally, a potential peace deal in Ukraine could create opportunities, prompting us to focus on 'peace' beneficiary names like Sika, Wienerberger, and Kingspan.