Equity indices performed well in April (MSCI Europe NR +2.5%, MSCI USA NR +1.2%). Corporate quarterly earnings have been very supportive. However, after a significant improvement since September 2022, recent macro releases have been rather weak in the developed countries, reinforcing the likelihood of a recessionary scenario in the months to come. The banking troubles have also rekindled systemic fears and led investors to focus on defensive stocks with strong balance sheets, while at the same time lowering their expectations of rate hikes by central banks. Long-term rates have thus fallen by nearly 50 basis points on both sides of the Atlantic since the beginning of March, which also provides relative support for Visibility/Quality securities, often qualified as « proxy bonds ».

These fears of a sharp economic slowdown led to a clear outperformance of defensive sectors and an underperformance of cyclical stocks in April. The cyclical bias of the Digital Stars funds and their underweight in defensive mega-caps had a negative impact on performances. However, banking stocks rebounded from their March falls. Performance was also influenced at the end of the month by quarterly earnings announcements, but with a notable asymmetry between the violence of the corrections caused by disappointments (particularly in semiconductors) and the timid increases in stocks that surprised positively. At the end of April, 26% of Digital Stars Europe stocks had reported, and 72% of these companies had seen their estimated profits for 2023 revised upwards. The pace of earnings announcements will intensify over the coming weeks, which should refocus investors’ attention on company fundamentals and could be more supportive of our strategy. In this difficult environment, Digital Stars Europe Acc posted a monthly performance of -0.6% compared to 2.5% for the MSCI Europe NR. Digital Stars Continental Europe Acc ended April at -0.4% against 2.2% for the MSCI Europe ex UK NR. Digital Stars Eurozone Acc achieved 0.5% against 1.5% for the MSCI EMU NR.

The rebalancing carried out in April was diversified, selecting stocks in the industrial, consumer discretionary and technology sectors, but also in non-cyclical sectors (healthcare, telecoms, and utilities). The outgoing stocks are mainly cyclical: Energy, Basic Materials and Banks. The fund’s profile is thus becoming slightly more defensive, adjusting to the economic slowdown. The overweight in banking stocks is lowered to 6.2% in Digital Stars Europe, while the overweight in energy is reduced to 2.9%. Digital Stars Europe is overweight financials, industrials, technology and energy. The fund is underweight in healthcare, food and utilities. Italy remains the fund’s largest weight and the largest overweight, at 16.4%, ahead of Germany (15.1%) and the UK (12.5%).

Digital Stars Europe Smaller Companies Acc ended down -1.0% in April, vs. +1.6% for the MSCI Europe Small Cap NR. The rebound of financials and the good publications of some stocks were not able to counteract the disappointing performance of our technology stocks.
The monthly portfolio reviews focused on strengthening specialty retail, IT, as well as energy and materials. Sales were mainly in industry and finance, as well as in healthcare and consumer staples.
The portfolio is still mainly overweight in consumer discretionary and energy, and significantly underweight in real estate and pharmaceuticals.
Italy (the most overweight country) weighs 17.9%, ahead of the United Kingdom (the most largely underweight country) at 16.2%, and Germany at 12.5%.

Digital Stars US Equities Acc USD was down -2.8% in April, vs. +1.2% for the MSCI USA NR and -1.4% for the MSCI USA Small Cap NR. The fund was affected by its IT holdings and its exposure to regional banks. Inter Parfums and e.l.f. Beauty continued their remarkable bullish run in April.
The latest monthly portfolio review saw stocks in the technology, healthcare equipment and real estate sectors enter the portfolio. Sales were mainly in banks, as well as in energy.
The portfolio remains overweight in industry, and has strongly reduced its over-exposure to (regional) banks. Media is still the most underweight sector.

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The banking sector’s woes reignited systemic fears in March. Volatility has made a comeback and is emerging from a long period of lethargy. At the same time, a powerful rotation within the stylistic and sectoral segments of the market occurred. The sharp drop in long-term yields, due to the increased risks of recession, also echoes a probable change in the pace of rate hikes by central banks. They now know the red line that must not be crossed in their monetary tightening. In this context, the Value segment, the big winner of the last 30 months, clearly underperformed in March due to its high exposure to Financials. Conversely, the “Visibility” style, which includes defensive, low-debt stocks with steady cash-flows, sometimes called « proxy-bonds », performed very well, both in absolute and relative terms.

After two months of gains for our funds, which benefited from positive surprises on stocks announcing their results, the situation was more complicated in March.  The collapse of Silicon Valley Bank, followed by Credit Suisse, reshuffled the deck, with a crash in banking and energy stocks. Our exposure to banks, our cyclical bias and our underweight in defensive mega-caps weighed. The sector rotation was so violent that, unsurprisingly, the funds underperformed and gave back performance. With the actions of the Federal Reserve and the Treasury Department, and the takeover of Credit Suisse by UBS organised by the Swiss authorities, the market stabilised, as did the relative performance of the funds. It should be noted that no discretionary decisions were taken during this period. Our solid experience in managing Digital Stars funds has taught us that discretionary decisions, which do not follow the model, are not profitable. There is no reason to believe that this time would be any different. So we continued to apply our models strictly, as we have always done in previous crises. As risk aversion diminishes, investors should once again focus on company fundamentals and news flow, especially as we approach the first quarter earnings announcement period, which is usually a good time for our strategy.

In this difficult environment, Digital Stars Europe Acc posted a monthly performance of -4.5% against -0.1% for the MSCI Europe NR and -4.1% for the MSCI Europe Small Cap NR. Digital Stars Continental Europe Acc ended March at -3.6% against 0.8% for the MSCI Europe ex UK NR. Digital Stars Eurozone Acc achieved -2.4% against 0.7% for the MSCI EMU NR.
Rebalancing in March was diversified, selecting stocks in the technology, consumer discretionary, healthcare and industrial sectors. Growth stocks are well represented in this selection. We stop to integrate financials as trends have been affected by the banking turmoil and some have been sold. The overweight in banking stocks has been reduced from 8.9% at the end of February to 6.9% in Digital Stars Europe. We are also selling energy and basic materials stocks. Digital Stars Europe is overweight financials, energy, industrials and technology. The fund is underweight healthcare, food and utilities. Italy remains the fund’s largest weight and the largest overweight, at 16.3%, ahead of Germany (15.5%) and the UK (13.3%).

Digital Stars Europe Smaller Companies Acc ended down -4.2% in March, in line with the MSCI Europe Small Cap NR at -4.1%. Positions in oil shipping and an underweight in real estate helped the fund overcome the impact of the banks.
The monthly portfolio reviews focused on strengthening IT and consumer discretionary. Sales were mainly in finance, as well as in energy and more defensive sectors like utilities or healthcare.
The portfolio is now mainly overweight in consumer discretionary and energy, as well as in banks, and significantly underweight in real estate and pharmaceuticals.
Italy (the most overweight country) weighs now 17.8%, ahead of the United Kingdom (the most largely underweight country) at 14.9%, and Denmark at 12.4%.

In a very divergent US market where the MSCI USA NR ended up +3.5% and the MSCI USA Small Cap NR -4.3%, Digital Stars US Equities Acc USD was down -3.7% in March. Significant exposure to regional banks had a strong impact on the fund, as did the under-exposure to technology mega-caps and the underperformance of our retail and oil companies. The good performance of Inter Parfums, e.l.f. Beauty and our healthcare stocks were not sufficient to compensate for this adverse effect.
The latest monthly portfolio review was diversified on the new entrant side. Sales were mainly in energy and consumer staples, as well as consumer discretionary.
The portfolio remains overweight in finance and industry, and underweight in media and pharmaceuticals.

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