Newsletter | April 2024

6 May 2024Newsletter,Financial News

NVIDIA accounted for 41% of the year-to-date gain in the US Large Cap Index

13.91% THE PERFORMANCE OF THE COPPER PRICE

Investment perspective

The paths of the major economies are increasingly diverging. In the United States, economic activity continues to expand, ruling out a recessionary scenario induced by cumulative monetary tightening. While US growth has probably peaked, it cooled more than expected in the first quarter of the year, growing at an annualized rate of just 1.6%, down from 3.4% in the fourth quarter of last year. Disinflation began in late 2022, but the pace of decline has slowed in recent months. Weaker growth combined with stubborn inflation could take us into the realm of stagflation, a term that has horrified most central bankers, as the last comparable situation was in the 1970s following the rise in oil prices caused by the Arab oil embargo. The euro area manufacturing sector continued to contract in April, but some positive developments should be highlighted, such as factory output shrinking at the slowest rate in a year. In contrast to the US, where the disinflation process has stalled, at least temporarily, European inflation has continued to fall, with the headline rate falling to 2.4% in March. April saw negative returns across all fixed income segments as long-term rates came under pressure. The 10-year US Treasury yield rose from 4.2% to 4.7%. European yields were not immune to this trend, with the 10-year Bund ending the month 30 basis points higher at 2.6%. Recent economic data spooked investors and triggered a general downturn, except for emerging markets. US blue chip equities fell by 4.2%. The decline was even more pronounced in the small cap segment, which fell by 7.0%. European equity indices fell less than their US counterparts, with little difference in market capitalization. The main European index fell by 0.9% in euro terms. The Japanese market was not immune to the selling pressure, falling 1.1% in local currency terms, exacerbated by the accelerating depreciation of the yen of around 4% in April alone. In China, the publication of better-than-expected GDP figures provided some relief to the growth momentum of the world's second largest economy. In the short term, the Chinese market rose by 6.6%, bucking the general decline in developed equity markets. Commodities can act as performance enhancers and offer countless opportunities. After gold and silver in March, base metals such as copper and zinc took over in April. Copper rose 13.9% over the month, benefiting from China's awakening and fears of tighter supply.

Investment strategy

The divergent paths of growth and inflation will force each central bank to pursue divergent monetary policies, in contrast to what we saw during the synchronized rate hike cycle. We still expect developed central banks, led by the Europeans, to start normalizing policy rates in June. As far as the Fed is concerned, it may postpone its first cut until September, with a more gradual pace than initially expected. Higher rates make bonds quite attractive from a valuation point of view. However, we remain cautious on duration. Our central scenario remains a steepening yield curve, which favors intermediate maturities given the current flat yield curve. Credit spreads have tightened, reflecting the growing acceptance of the soft-landing scenario. US equities remain relatively vulnerable to "higher for longer" rates due to high valuations (all measures well above multi-year averages and close to the highest levels in over two years). European equities look attractive relative to the US, especially if the ECB starts cutting rates in June. Pressure on the Japanese yen could trigger either higher interest rates or currency intervention, both of which would lead to tighter financial conditions, which are not favorable for Japanese equities. The outlook for Chinese equities has brightened and offers attractive relative undervaluation.

Q1 2024: US companies report higher net profit margin quarter-on-quarter

Portfolio Activity/ News

We had highlighted the favourable seasonality of April in terms of market returns and the critical levels reached by various technical indicators. This technical configuration led us to be more cautious in our allocations than at the beginning of the year. A cautious stance was clearly rewarded during the month, whereas blindly following historical observations would have resulted in significant losses. Against this volatile backdrop, it is worth noting the positive performance of our L/S manager in US equities, which delivered positive return. To take account of the deterioration in the technical picture, particularly in US 10-year Treasury yields, we reduced our equity allocation during the month in favour of cash. We continued to make adjustments to the composition of our equity portfolio. We took profits on so-called growth stocks in the US, Europe and globally and reallocated part of the proceeds to value managers in order to achieve a better sector balance and factor exposure (value versus growth). We have not changed our bond positioning, which remains generously exposed to credit (IG and HY) and emerging markets. The sensitivity to volatility remains moderate, given the flat yield curve and the expectation that the curve will steepen. We recognise that at these yield levels, rates are competitive and offer good protection in the event of a more pronounced economic downturn. We maintain our weighting in liquid alternative strategies, which should continue to add to performance, as they have done since the beginning of the year, thanks to their exposure to commodities.

Download the Newsletter

by Jessica Afsal

Newsletter | March 2024

8 April 2024Newsletter,Financial News

The US Large Cap Index hit eight new closing highs in March

10.09% THE PERFORMANCE OF SILVER PRICE

Investment perspective

Despite the most aggressive tightening cycle, the US economy continues to defy the historical relationship between economic growth and interest rates. We expect US real GDP to grow by around 2% this year, with the potential for upside surprises. Recent headline inflation readings have pointed to some upward pressure, while core inflation has declined slightly, without calling into question our central scenario of a gradual decline in inflation towards 2.0%. Eurozone inflation surprised to the downside in March, with headline inflation coming in at 2.4% year-over-year, below the consensus of 2.6%. The SNB, acting very independently, surprised the market by starting the long awaited cycle of rate cuts among developed central banks. The Fed and the ECB have reiterated their intention to cut rates several times this year and next. Despite higher-than-expected inflation rates, the Fed expects that stronger than-expected labor force growth and increased investment will stimulate the supply side to the point that inflation will continue its downward trend. The BoJ raised its key rates (dovish hike) but will continue to buy large amounts of government bonds each month. The 10-year US Treasury yield fell slightly to end the month at 4.2%, while in Europe the 10-year Bund followed the same trend to end the month at 2.85%. US large cap equities hit eight new closing highs in March, rising 3.1% for the month. Breadth improved over the month and was strongly positive, with the equal weight index gaining 4.4%. We are seeing an increasing divergence in the return patterns of the Magnificent Seven, with Tesla down 29.3% year-to-date. European equity indices rose by 4.4% in euro terms over the month, outperforming their US counterparts. It should be noted, however, that while the market breadth is also underway, it is still very tentative. In line with the start of the year, emerging markets continue to lag, while the Japanese market continues to deliver an excellent return in local currency terms, up more than 19% year-to-date. The highlight of the month was undoubtedly the surge in gold and silver prices, up 8.3% and 10.1% respectively over the month, as lower interest rates increase the appeal of holding non-yielding bullion.

Investment strategy

The near-term growth outlook in the US remains solid, with economic data continuing to surprise on the upside. The median forecast for real GDP growth in 2024 has risen from 1.4% at the December FOMC meeting to 2.1% today. The Eurozone economy is on the upswing, with the latest business surveys pointing to the fastest expansion of private sector activity in ten months. Business optimism rose to its highest level since the eve of Russia's invasion of Ukraine. The eurozone's economic recovery should continue, with growth forecasts for the first half of 2024 potentially revised upwards. The main risk is a rise in commodity prices, which could lead to a resurgence of inflation in European economies. European leading economic indicators are clearly picking up, but Europe’s still very attractive valuations suggest that a lot of negative news is still priced in. The probability of positive surprises could therefore increase as the European economies regain traction. The Swiss equity market could benefit from the recent interest rate cut by the Swiss National Bank and the weakening of the Swiss franc. These developments will help mitigate the headwinds faced by Swiss companies last year and contribute to positive earnings revisions.

Estimated 1Q24 y/y earnings growth rate for the S&P 500 is 3.6%, third straight quarter of y/y earnings growth

Portfolio Activity/ News

Many technical indicators have reached levels historically associated with tops, but the trend is still our friend as it remains clearly up. Investor optimism could continue into April, which is historically one of the strongest months of the year for the US equity market. We are therefore maintaining our overweight in equities, with a clear preference for European equities, to take advantage of the current macro and market momentum, although we have reduced this overweight somewhat. We have also made some adjustments to the composition of our equity exposure, increasing the allocation to a top-down strategy at the expense of strategies with a strong growth bias. Chinese equities were very oversold and the recent rally has helped a little, but market psychology is extremely bearish on Chinese equities, which can be interpreted as a contrarian signal for this market. We are maintaining our exposure to Chinese domestic equities. The Chinese A-shares are our main exposure to emerging markets in our portfolios. Our bond portfolio remains exposed to both investment grade and high yield credit as well as hard currency emerging market debt. We added to the latter in March. Although our interest rate sensitivity has increased, it remains lower than that of the main bond indices. We are keeping a close eye on the resistance level for US yields (4.35% for the 10-year yield), as a breach of this level could send a particularly negative signal to the markets.

Download the Newsletter

by Jessica Afsal

Newsletter | February 2024

13 March 2024Newsletter,Financial News

S&P 500 reached a record high in January (4’931.09) for the first time since January 2022

10.79% THE PERFORMANCE OF CHINESE -A- ONSHORE

Investment perspective

In the US, the latest economic data showed that gross domestic product rose at a revised annualised rate of 3.2% in the fourth quarter, compared with a previous estimate of 3.3%. Between the beginning of January and the end of February there were even signs of a slight upturn in US economic activity. There have been mixed signals from the labour market and on the inflation front. The strength of the labour market and the renewed tensions on the inflation front clearly support the Federal Reserve's position. The main consequence of these robust figures is that they have removed any chance of a first cut before the June meeting. In Europe, the ECB left interest rates unchanged. After a period of optimism, with expectations of more than 100bps cut as early as April, market expectations have adjusted to a 90-95bps cut from June, in line with the Fed. In Japan, the government reported that the economy contracted at an annual rate of 0.4% between October and December, although it grew 1.9% for the year, but contracted 2.9% in July-September. The stronger core CPI pushed JGB yields higher and should be a warning sign that the $20 trillion global carry trade financed by shorting the JPY is likely nearing an end. The flash manufacturing PMI fell to 47.2 in February from 48.0 in January, signaling a ninth consecutive deterioration in operating conditions, the most since August 2020. US Treasuries were significantly weaker, with the 10-year US Treasury yield ending the month at 4.25%, while in Europe the 10-year Bund also ended the month higher at 2.41%, up from 2.02% at the end of December. US stock indices ended the month higher, closing above 5,000 for the first time on 9 February. Major technology companies were higher overall, helped by the continued momentum of Nvidia (+28.7% over the month). Europe was not left behind, with the main European index reaching a new all time high. As in 2023, the UK index lagged due to its exposure to mining, oil, and real estate. It should be noted that corporate earnings were better than expected, which should continue to support price rises. The dollar was again particularly strong against the yen and was flat against the euro. Gold closed down 0.6%, while oil was higher (up 3.2%).

Investment strategy

The broad consensus on the path of interest rates remains uncertain, but the market expects rates to move lower, with 100 bps of easing in the US this year starting in June. After the strong rally in markets into year-end, valuations across asset classes look somewhat stretched, for example spreads on the fixed income side as well as equity indices. Despite acknowledging stretched trailing PE multiples, many strategists have raised their annual target for the S&P 500. Driven by a handful of names, large cap EPS forecasts are trending higher, while small and mid cap index earnings continue to trend lower. Momentum and quality indices continue to outperform value year-to-date. This is true across and with asset classes especially the Nikkei, which has reached record levels and is one of the best performing equity indices in local currency terms so far this year. In the US, several technical records are being tested by the ongoing exuberance, including 16 positive weeks out of the last 18 - the best streak since 1971 - and a market rally (+24%) without a 2% decline in 20 years. Indicators suggest that, based on historical patterns, a correction may be overdue. For the first time since last summer, China's stock indices are trading above their 50-day moving average.

Emerging Market Sovereign Hard Currency HY was up by 2.10% in February, while IG was down by 0.61%

Portfolio Activity/ News

The correction in the rate cut expectations of the major central banks in the developed world is now more in line with the message they have been distilling for the past year. This rebalancing should underpin the credibility of central banks in their determination not to act too hastily at the risk of seeing inflation rise again. Against this backdrop, we believe it would be prudent to increase our bond weighting in order to increase the interest rate sensitivity of our portfolio. We have therefore initiated a position in long-dated government bonds to take advantage of the expected easing in long-term yields. At the same time, we are maintaining a large proportion of our bond portfolio in both investment grade and high yield corporate bonds. While remaining constructive on markets, we decided to continue taking partial profits on some of our global equity holdings. After this reduction, we remain overweight in equities, with a preference for Europe, China and US technology. We reiterate the value of alternative strategies, particularly trend strategies, in this environment of trend extension. We have therefore increased our positions in alternative trend strategies, which combine price and macro signals, and in our existing global macro strategy.

Download the Newsletter

by Jessica Afsal

Newsletter | January 2024

12 February 2024Newsletter,Financial News

S&P 500 reached a record high in January (4’931.09) for the first time since January 2022

1.92% THE PERFORMANCE OF THE DOLLAR INDEX

Investment perspective

In January, US economic data continued to support the outlook for continued economic strength while disinflation remained in evidence. In Europe, the Eu-ropean Central Bank (ECB) kept interest rates unchanged. On the economic front, the release of the composite Purchasing Managers’ Index beat expecta-tions, suggesting that manufacturing activity is bottoming out. Against this backdrop, asset class performance was mixed over the month. Fixed income indices posted slightly negative returns, with the long-dated gov-ernment bonds posting the largest decline as long-term yields rose, reversing the gains seen in December. US and European 10-year yields were mostly higher as the curve steepened. There was some relief in the US at the end of the month thanks to lower expectations for US Treasury borrowing. As in 2023, high yield corporate bonds, especially European ones, were again the best performers with a return of 1.1% thanks to a significant narrowing of average spread levels (381 bps for pan-European high yield versus 399 bps at end-December). Equities started the year on a weak note before rallying strongly to end the month higher, despite the Fed's hawkish tone at its January meeting and Chair-man Powel's comments that he did not think a March cut was likely. In terms of returns, we observe the same hierarchy as last year, with Japanese equities (+8.5% in local currency) leading the pact, followed by US large caps (+2.5%), helped by some technology names, and finally Indian equities, while small caps (-3.9%), global emerging markets (-4.6% in USD) and China (-10.6%) were the laggards. It is worth noting that the S&P 500 reached its highest level ever dur-ing the month as the "Magnificent Seven" continued their fantastic run. Commodities delivered positive returns with oil gaining ground, with WTI crude up 5.9%, as tensions in the Middle East escalated and disruptions to shipping routes continued. Gold lost just over 1% in US dollar terms after hitting a new all-time high in December, reflecting a stronger dollar (the dollar index rose 1.9% over the period after three consecutive months of decline).

Investment strategy

So far this year, at least in the US, the 2023 laggards are back to lagging and the winners are back to winning as demonstrated by the performance of the US momentum index, which returned 5.6%. Risk asset prices are significantly higher than three months ago, thanks to the Fed's shift from "higher for longer" to "we are done hiking to ease in 2024". However, the timing and pace of rate cuts remain uncertain, as does the path of quantitative tightening (QT). Although the Fed has signalled its intention to cut three times this year, future markets are pricing in more cuts, assuming that the Fed will act faster and more than it has publicly signalled. Long-term interest rates in developed markets have peaked and offer attractive yield levels. Although interest rate cover has started to deteriorate, corporate fundamentals are starting from a position of strength. As credit spreads have tightened, we should therefore expect that future total returns to be driven mainly by carry rather than spread tightening. After the rally since the end of October, it is time to trim the sails by gradually reducing the directionality of our exposures and building up some liquidity reserves to take advantage of any opportunities that market volatility may present.

Pan-European high yield yields are still above 7.6% and spreads are actually tighter (381 bps) than a year ago

Portfolio Activity/ News

Our positioning since the end of October has allowed us to participate to a large extent in the rally in the last three months. Aware that credit spreads are tight, we are nevertheless maintaining our credit exposure, particularly in high yield, while favouring greater selectivity and quality. We maintain a generous equity weighting in our portfolios, but recognise that greater caution is undoubtedly warranted. We are gradually reducing our equity market positions by a few percentage points and reintroducing long/short strategies into our US equity portfolio. In both Europe and the US, we continue to favour a bias towards quality growth, without ignoring the potential benefits of value. We remain constructive on small caps, particularly in Europe and Switzerland. Although our call on China has proved painful so far, we are maintaining it and taking the opportunity to bring this weighting back to the desired level after the downturn. Finally, our allocation to liquid alternative strategies will reflect our less directional approach to markets by reducing our high beta investments in favour of less directional strategies. We will also introduce an alternative trend strategy to complete our alternative bucket, with the aim of adding further resilience to the overall portfolio.

Download the Newsletter

by Clara Barton

Newsletter | December 2023

14 December 2023Newsletter,Financial News

S&P 500 and Nasdaq both posted their biggest monthly gains since July 2022

10.7% THE PERFORMANCE OF NASDAQ COMPOSITE

Investment perspective

November saw broad-based gains in bond and equity markets on the back of slowing inflation and easing interest rate pressures. As expected, the FOMC left interest rates unchanged, although Chairman Powell indicated that the Fed would raise interest rates if warranted by the data and economic conditions. The latest release showed that the US economic activity had slowed, with mixed consumer activity due to higher price sensitivity.

Fixed income markets, particularly those with high interest rate sensitivity, reversed course after three months of declines and posted broad-based gains. The US 10Y ended the month at 4.34% (it reached 5.02% in October), down 80 bp from its peak but still higher than in January, while the German 10Y ended the month at 2.45%, 10 bps lower than at the end of 2022. The recent release of lower-than-expected preliminary eurozone CPI for November, which rose 2.4% y/y, slowing from 2.9% in October, acted as a catalyst.

Strong gains in the government bond sector, e.g., US Long Treasury up 9.16%, were accompanied by a tightening of credit spreads, which helped all credit segments. For example, the US dollar hedged Global Aggregate Index gained 5.7%, the Global Aggregate Corporate and Global High Yield gained 4.7% and 5.4% respectively, while the EMD High Yield gained 6.1%.

Consumers ended the month better than expected, with Black Friday online shopping estimated at a record $9.8 billion, Cyber Monday sales estimated at a record $12 billion and total Thanksgiving sales estimated at $38 billion. In this context, the All-Country World Equity Index rose 8.1% in local currency terms, 9.2% in US dollar terms and only 5.8% in euro terms. Breadth improved significantly in November. In the US, the large cap index was up 9.1%, while the tech heavy Nasdaq 100 was up 10.7%. Europe, Japan, and emerging markets gained 6.4%, 6.0% and 8.0% respectively. Within Europe, it is worth noting that the small cap index strongly rebounded, rising almost 9% in euro terms.

The US Dollar Index (DYX) was under heavy pressure and closed 3% lower, the Emerging Market Currency Index gained 2.8% and the Chinese Renminbi gained 2.5%. West Texas Crude Oil ended the month down 6.2% while Gold gained 2.7% over the month. The equity volatility index (VIX) fell to 12.9%, its lowest monthly close level in 2023.

Investment strategy

October’s CPI confirmed the disinflationary momentum, with the annualized core CPI at its lowest level since September ‘21, while the core PCE fell to its lowest level since March ‘21.

The release of better inflation data came as a relief, allowing the US 2-year Treasury yield to fall 35bp to around 4.7% and the US 10-year yield to fall 55bp to around 4.35%. The rise in interest rate contributed to a significant easing in financial conditions amid growing optimism about the end of the tightening cycle.

Since the November FOMC meeting, we have seen a significant shift in Fed funds rate expectations. Indeed, market participants are now pricing in a near-zero chance of a rate hike in December. Despite Fed officials reiterating their “higher-for-longer” message, the market’s median expectation for the fed funds rate at the end of 2024 fell from a high of 4.83% to 4.19% at the end of November.

The potential pivot in central bank policy, positioning and improved sentiment were the main drivers behind the market rally. EPFR flows data showed a net inflow of $40bn into global equities in the two weeks to 21 November. In the US, the 3Q earnings season ended with growth of around 4.8% as at 30 November. The focus now turns to 4Q23, which fell further this month to 2.9% from 8.0% at the end of September, putting the double-digit earnings growth rebound in 2024 under greater scrutiny.

EMERGING MARKET DEBT CORPORATE YIELD-TO-WORST STANDS AT 7.5% AT THE END OF NOVEMBER

Portfolio Activity/ News

US indices broke a three-month losing streak, while Treasuries posted one of the best monthly performances on record, with a rally across the curve and some flattening. As highlighted in October, the market rallied strongly on a positioning tailwind that could continue as trend strategies and shorts continue to unwind positions.

We started the month with an overweight position in equities, which we increased during the month with some rebalancing out of defensive strategies such as US long/short and global low volatility in favour of a global strategy that uses a very compelling combination of macro decisions with more traditional bottom-up stock picking as part of the process.

In fixed income, we carried on our gradual increase of our interest rate sensitivity and maintained our constructive stance on credit including our emerging market high-yield corporate debt position.

Similar to our equity allocation, we have reduced our positions in credit long/short strategies and those invested primarily in leveraged loans, which have very low interest rate sensitivity.

Our allocation to liquid alternative strategies has remained broadly unchanged, with a clear preference for risk-parity strategies over trend and global macro strategies, while recognizing that trend strategies may have been repositioned after the rally and could therefore benefit from further upside.

Download the Newsletter

by Jessica Afsal