Newsletter | May 2022

GLOBAL BONDS RECORDED THEIR WORST EVER MONTHLY DROP

- 13.3% THE TORRID MONTH OF APRIL FOR THE NASDAQ COMPOSITE

 

Investment perspective

The month of April was a brutal one for financial markets. In an environment where bond yields continued to rise at a fast pace, and the appreciation of the US dollar accelerated, equity and bond markets both ended the month much lower. The MSCI World Index in local currencies plunged by 7%, mainly due to the weak performance of US equities. The Bloomberg Global-Aggregate Total Return Index, a broad bond index, lost 5.5% and recorded its biggest monthly drop since its inception in 1990. 10-year Treasury yields rose by 60bps to end April at 2.94%, and Bund yields with a similar maturity moved up to 0.94%, an increase of 39bps; credit and emerging market debt were also impacted by a widening of spreads. The overall strength of the US dollar was reflected by a 4.7% depreciation of the EUR/USD parity to 1.055, a level last observed more than five years ago.

The main drivers of markets in April were the increasing hawkishness of the Federal Reserve, as well the reporting of first quarter earnings. Markets are now pricing in a 50bps rate hike in May, with same-size hikes also likely to be announced at the following meetings. With more than 80% of the S&P 500’s market cap having reported, earnings are beating estimates by 6.5%, with 77% of companies topping projections. These solid results have not prevented US equities from getting battered during the past month. Some of the darlings of the past years, which contributed largely to the strong outperformance of US equities relative to other regions, have been experiencing a significant derating. Investors have punished high-growth companies such as Netflix which saw subscribers fall for the first time in a decade. Soft guidance from Amazon, a supply constraints issue for Apple and disappointing earnings from Alphabet are just some of the reasons for the poor performance of these companies’ stocks in April.

 

Investment strategy

We are maintaining the current allocation of our portfolios amidst very depressed market sentiment. The Fear & Greed Index is in fear territory, whereas the AAII bull/bear Index is showing the highest level of pessimism since March 2009. Investors are facing massive uncertainty on a number of issues, and markets have become over reactive and prone to huge swings. At the time of writing the Federal Reserve has just hiked by 50bps, as fully expected, but US equities rallied by 3% after Jerome Powell ruled out the possibility of a 75bps hike at a forthcoming meeting. This move appears overdone but reflects the current level of noise across the markets and we prefer to look further ahead and not attempt to trade the market daily.The month of April was another very tough month for fixed-income assets, but we might be approaching a point where the timing looks more favourable for the asset class. A lot of adjustment in risk-free rates has already taken place in view of the expected tightening of central banks, and the outlook for credit remains supportive.

WITH MARKET SENTIMENT BEING DEPRESSED, MARKETS COULD STAGE A NEAR-TERM REBOUND

 

Portfolio Activity/ News

April was a negative month for the portfolios. With both the equity and fixed-income asset classes recording monthly losses, it proved to be a very difficult market environment. The main detractors were the multi-thematic growth fund, US Small Caps, the technology fund, Japanese and Chinese equities, and European Small Caps. The recently added global equity fund exposed to companies with stable returns was resilient as were some emerging market exposures. In the fixed-income asset class, the losses of our exposures were generally less than those of their reference benchmarks, even if the fund with longer duration was obviously badly hit by fast-rising rates.

On a more optimistic note, alternative strategies have continued to outperform and to fulfill their diversification role within the portfolios. Several hedge funds provided positive contributions, in particular the trend-following CTA strategy, thanks to its significant short exposure to rates. For non-USD denominated portfolios, the appreciation of the US dollar also contributed positively to the performance.

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Newsletter | April 2022

MARKETS STAGED A STRONG REBOUND FOLLOWING INITIAL HIT AS WAR BREAKS OUT IN UKRAINE

+ 51bps THE STEEP RISE OF 10-YEAR TREASURY YIELDS IN MARCH

Investment perspective

The month of March was characterised by two distinct periods for financial markets as early-month weakness was followed by a strong rebound of risk assets. The MSCI World in local currencies gained 2.9%, with the S&P 500 ending 3.6% higher, whereas the Euro Stoxx 50 dropped by only 0.6% after recovering most of its early-month losses. This performance of equities was quite impressive considering the dramatic events in Ukraine, and also in view of the significant rise of bond yields. An increasingly hawkish Fed triggered a 51bps rise of 10-year Treasury yields, with 10-year Bund yields also jumping by 41bps. In FX markets, the US dollar appreciated while the Japanese yen plunged by 5.5% vs. the USD, mainly as a result of the diverging monetary policies between the Bank of Japan and the Federal Reserve. It was another strong month for commodity prices, even if those of energy and gold ended the month well below early-March peak levels. Gold spiked to $2’050 per ounce on March 8, before declining significantly to finish the month at a level of $1’937 per ounce.

Since the beginning of the year, bond markets have had a rough ride and the drawdown of bond indices has been severe. This has been firstly due to the impact of the Federal Reserve’s very hawkish shift towards both higher rates and a faster pace of these hikes, and also the upcoming contraction of the central bank’s balance sheet. Markets are now pricing in a 50bps rate hike at the May’s FOMC meeting, with other 50bps hikes also appearing as likely. Corporate credit markets have also been hurt by significant spread widening, whereas positions in Russian and Ukrainian debt has severely hurt investors exposed to issuers from these countries. The first-quarter performances of the main bond indices range from -5% to -10%, meaning that they have more or less been in line with the performances of equity indices.

 

Investment strategy

We are pleased to report that our end-February decision not to cut equity positions at the onset of the war in Ukraine has been vindicated in view of their strong recovery since early March. Our assumption was that the war, as dramatic as any conflict always is, would have only a limited and temporary effect on markets, as often observed historically. Our equity allocation has recently been reduced and, were equities to record further gains, we intend to continue moving their exposure towards a neutral positioning.

The fixed-income asset class has had a challenging start to the year, due to fast-rising rates and wider credit spreads. As a reminder, our allocation to the asset class is underweight, in particular towards investment-grade, and the duration is low overall. Last year’s gradual shift towards more market-neutral strategies such as event-driven or long/short credit has been very helpful this year. These strategies have been much more resilient and much less volatile than most long-only fixed-income strategies.

MARKETS COULD WELL REMAIN RANGEBOUND IN THE NEAR TERM

 

Portfolio Activity/ News

March was a positive month for the portfolios. There was a significant amount of dispersion between the performances of the different funds. Most fixed-income exposures posted negative returns whereas the majority of equity funds ended the month with gains. The best contributions were provided by the metal mining fund, the trend-following CTA strategy, the real assets fund, and the recently added global equity fund. The main detractors were the Chinese equity fund, one of the high yield strategies, as well as long duration bond funds. For non-USD denominated portfolios, the appreciation of the dollar also contributed to the positive performance.

In March, we trimmed some of the positions having outperformed and thus raised the portfolios’ level of cash. We took advantage of the strong rebound of equity markets from their early-March lows to carry out these transactions. We also boosted the exposure to the US dollar and have hence reduced its underweight compared to the reference index. For the balanced portfolios which are not denominated in dollars, the allocation has increased from 10% to 15%.

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Newsletter | March 2022

MARKETS HIT BY HAWKISH CENTRAL BANKS AND DRAMATIC EVENTS IN UKRAINE

- 26% THE COLLAPSE OF THE ROUBLE VS. THE DOLLAR IN FEBRUARY

Investment perspective

It is with a heavy heart that we write this newsletter and our thoughts go out to all the victims of the war in Ukraine. In face of such a human tragedy, to comment on financial markets feels like a somewhat futile exercise but we remain committed to our task.

At the beginning of February, markets continued to price in a higher number of rate hikes by the Federal Reserve and expectations for a rise of rates from the ECB also rose significantly. Equity markets proved to be quite resilient, nevertheless, helped by the reporting of solid earnings generally; there were also some big disappointments, however, from companies including Meta Platforms (ex-Facebook) and Paypal. The second half of the month was mainly driven by the rising geopolitical tensions on the Ukrainian border, and then by the worst case scenario, when Russian forces started to invade Ukraine on February 24th. While European equities dropped steeply that day, as to be expected, US equities ended much higher as they dramatically recovered from a very weak opening. For the whole month, the S&P 500 dropped by 3.1% and the Euro Stoxx 50 by 6%. Big swings were also observed in the bond markets, as an initial rise of long term yields was then mostly erased. The yields of 10-year Treasuries and Bunds rose from 1.78% and 0.01% to 2.05% and 0.32% respectively, before ending February at 1.83% and 0.13%. In the current context, commodity prices have continued to rise, with energy, industrial and precious metals, and grains appreciating strongly. The US dollar ended the month higher, logically, as investors seeked refuge in the greenback.

Investment strategy

The dramatic events in Ukraine have added to the challenges that financial markets had already been facing. Historically, such events had relatively limited and temporary effects on the markets. This seems to be confirmed by their reaction, so far, since the beginning of the Russian invasion. With the obvious exception of Russian assets, European ones have been the worst impacted, as to be expected, but some markets are in positive territory since February 23rd, with others recording limited losses. Our model portfolio’s exposure to European equities has been underweight for some time, essentially due to an overweight towards emerging markets. This explains why we have not cut our allocation to Europe and believe that the broad diversification of the portfolios is well adapted to the current environment. Frequent and sudden rotations between regions, styles, sectors, and market capitalisations should continue to take place at a very fast pace and it is illusory to attempt to constantly be in sync with these shifts.

DEVELOPMENTS IN UKRAINE TO DRIVE MARKET SENTIMENT IN THE NEAR TERM

Portfolio Activity/ News

February was a negative month for the portfolios. As in the previous month, both bond and equity markets were weaker due to rising yields, wider credit spreads and deteriorating market sentiment. European Small Caps and Value, the global technology fund, and emerging market debt were the main detractors. Some positive contributions were provided by the exposure to gold, the healthcare fund and the metal mining fund, which benefited from rising commodity prices. In the alternative space, the long/short credit funds, the Event- Driven strategy, the CTA and Global Macro strategies were resilient and played their part as portfolio diversifiers.

In February, we made some switches in the model portfolios. The emerging markets’ growth equity strategy was replaced by an Asia ex-Japan fund with a value approach. The purpose is to benefit from extremely low valuations for the fund’s companies and to reduce some of the overlap with the China equity fund. A global fund with a focus on growth was also replaced by another global equity fund exposed to “boring” businesses with stable returns. The objective, in both cases, was to reduce some portfolio volatility and to rebalance the allocations to growth and value funds.

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Newsletter | February 2022

A HAWKISH FED SENDS GROWTH STOCKS TUMBLING

- 9% THE JANUARY DROP OF THE NASDAQ COMPOSITE INDEX

Investment perspective

Financial markets have got off to a very volatile start in 2022 largely due to the increasingly hawkish tone of the Federal Reserve, but also in view of a lack of visibility on several key issues. The US equity markets underperformed as growth stocks were badly hit by the prospect of rising interest rates. European and UK equities proved more resilient as they benefited from a rotation into value stocks, more highly represented in their indices. Significant rises of bond yields were also observed with short-term US ones the most impacted by the anticipation of a higher number of interest rate rate hikes; 2-year Treasury yields thus rose from 0.73% to 1.16%. Even if Eurozone yields also increased, the widening of the interest rate differential between Treasuries and Bunds underpinned the US dollar. Finally, the commodity complex appreciated strongly, with the biggest moves recorded by energy and industrial metals.

The most likely path of the Federal Reserve’s monetary policy has been reassessed continuously by investors since the beginning of the year. The hawkish pivot of the central bank in December moved to a new level, making markets very choppy on concerns that the Fed mighty tighten policy even more than expected. The mention in January of an upcomig reduction of the Fed’s balance sheet took investors by surprise, and a first rate hike in March now appears as a done deal. The following steps are less predictable even though markets are now pricing in five hikes in 2022 compared to three at the beginning of the year. Notwithstanding the prospect of higher interest rates, investors remain confused by the level of uncertainty that the central bank, and Powell in particular, is predicting. Added to the uncertainy over inflation, supply chains, the pandemic and the situation on the Ukrainian border, it is not surprising that markets were badly shaken during the past month.

Investment strategy

Following a solid end to 2021 for financial markets, January has provided a stark reminder of how quickly conditions can change. The speed at which the Federal Reserve is looking to normalize its monetary policy is destabilizing the markets and it will likely take some time for an equilibrium to be found. Our base case scenario still favours equities as being the main drivers of portfolio performance, and we are prepared to tolerate higher volatility in the near term in view of our longer-term outlook. Economic growth should remain above its long-term potential and corporate earnings are expected to grow further, even if at a slower pace. From a historical perspective, the beginning of a tightening cycle by the Fed has not prevented positive equity returns as long as the rise of rates is gradual, and a recession is not in sight.

Markets are likely to be much more challenged in the year ahead. Less supportive monetary policies, a decelerating trend of earnings growth, elevated economic and pandemic-related uncertainties are the main headwinds they will have to face. These factors largely explain why we anticipate more moderate portfolio returns in 2022.

MARKETS TO REMAIN VOLATILE AS ELEVATED UNCERTAINTY UNLIKELY TO DISSIPATE SOON

Portfolio Activity/ News

January was a disappointing month for the portfolios. With both bond and equity markets dropping simultaneously, the majority of funds detracted from the performance, as to be expected. US Small Caps, the Multi-thematic fund, European Small Caps, the global technology fund and one of the Japanese funds were the main detractors. On the positive side, some positive contributions were provided by the European Value fund, long/short equities and the UK Value fund. For non-USD denominated portfolios, the appreciation of the dollar was also a positive contributor. In the alternative space, the long/short credit funds and the Event-Driven strategy had limited drawdowns, whereas the CTA and Global Macro strategies fared less well. The selection of active managers is at the core of our invest-ment approach, with the objective of generating significant alpha relative to benchmarks over the long term. There will be periods when we must accept some underperformance relative to a more passive approach. We are currently going through such a period and will be looking for our active funds to catch up their gap and re-establish their long-lasting track-record.

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Investment Perspectives 2022

Executive Summary

2021 was another positive year for risk assets

2021 was less stressful for investors than 2020, but it was an eventful year, nevertheless. Markets proved to be resilient, overall, and trends were quite entrenched. The different asset classes behaved mostly as we had expected, with equity markets moving higher, credit spreads tightening, and bond yields rising. The appreciation of the US dollar was more of a surprise, as was the severe underperformance of emerging markets, in large part due to heavy-handed regulatory interventions in China and political issues in Latin America.

The growth of corporate earnings was even stronger than forecasted. This growth drove equity prices much higher in developed markets, accompanied by a compression of valuations. As in 2020, rotations between investment styles and sectors were much in evidence, with the initial outperformance of value stocks being gradually clawed back. The above-average gains of the US mega-caps was also striking, making it difficult for active managers to beat the returns of indexes.

Central banks are facing serious challenges

Central bankers will be put to the test in the year ahead. They will need to find the right balance between their fight against inflation pressures, which they have underestimated, and the risk of withdrawing liquidity too quickly. Their task will not be made easier in view of the unpredictable evolution of the pandemic. The Federal Reserve has been more forthright than the European Central Bank in regard of its plan to unwind its asset purchase program and to raise interest rates thereafter. Following the projected end of its tapering in March, the Fed will then have to decide when to start hiking the fed fund rate. Current expectations are for this rate to be raised three times by 0.25% in 2022 from the current target rate of 0%-0.25%. The Fed’s communication has contributed to contain market volatility, at least so far, but a policy mistake could easily derail the prevailing positive market sentiment and trigger a correction of asset prices.

Markets are likely to look beyond the threat of new COVID-19 variants

The global economy is projected to grow 4.9 percent in 2022, according to the IMF, a growth rate which remains above average as the recovery continues. Recurring coronavirus outbreaks have created stop-and-start economies and governments worldwide will be hoping for a smoother recovery in the year ahead. This would contribute to resolve some of the ongoing supply chain bottlenecks. Each time new COVID-19 variants were found, capital markets recovered very quickly from brief periods of higher volatility. This behaviour of markets should persist, especially if new strains were to prove increasingly less virulent, as is the case with Omicron.

We still favour equities despite their smaller appreciation potential

We expect equities to be the main contributors to the performance of portfolios in the year ahead. Global earnings are forecasted to grow by 10% to 15% and they will be the main driver for the equity asset class as valuations are not expected to expand from the current levels. We anticipate more modest returns for the portfolios in 2022. Equities are unlikely to match their performances of 2021, whereas the environment will remain challenging for fixed income assets as key central banks tighten their policies to fight against elevated inflation pressures.

 

Table of contents

  • EXECUTIVE SUMMARY
  • 2021: REVIEW OF OUR INVESTMENT THEMES
  • 2021: ECONOMIC & POLITICAL DEVELOPMENTS
  • 2021: THE FINANCIAL MARKETS 
  • 2022: ECONOMIC OUTLOOK
  • 2022: FINANCIAL MARKETS' OUTLOOK
  • 2022: ASSET ALLOCATION

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Newsletter | December 2021

A NEW COVID VARIANT AND A MORE HAWKISH FED SPOOK THE MARKETS

- 20.8% A PLUNGE OF WTI OIL PRICES IN NOVEMBER

Investment perspective

Following a positive start to the month, global equities ended November on a very weak note as investors were spooked by the discovery of a new Covid variant, Omicron, in southern Africa. This late-month news was compounded by Jerome Powell’s more hawkish tone, indicating his willigness to speed up the Fed’s tapering. The MSCI World Index in local currencies fell by 1.6%, with European equities underperforming and US equities proving to be much more resilient. In a risk-off market environment towards the end of the month, government bond yields tumbled. 10-year Treasury yields declined from a month-high of 1.66% to 1.44% and 10-year Bunds ended the month 0.24% lower at - 0.35%. A most dramatic move of oil prices was also observed in November. Concerns over weaker demand due to lockdowns in Europe and the new Covid variant pushed the price of a barrel of WTI oil 21% lower.

At a time when markets were already under stress due to concerns about the effectiveness of vaccines to tackle the new Omicron strain, the Federal Reserve’s Chair, Jerome Powell, signalled his support for a faster withdrawal of the central bank’s asset purchase programme. During his first testimony to Congress following his nomination for a second term, Powell proved to be significantly more hawkish on inflation than previously. His comments led to a further drop of equity markets, especially as investors had wagered that the Federal Reserve would take a more patient approach to raising rates due to the emergence of the new Omicron variant. The shifts of expectations relative to rate hikes were reflected by the whipsaw of 2-year Treasury yields during the month. After initially declining from 0.49% to 0.4%, they then spiked up to 0.64% before ending November at 0.5%.

Investment strategy

In view of the high uncertainty surrounding the latest Covid variant, we have decided to stay the course and not take any rash decisions. Based on previous episodes when new Covid variants were discovered, market drawdowns proved to be limited and fleeting. We are unable to predict the effective-ness of the current vaccines against the Omicron strain, we thus prefer to focus on the underlying fundamentals at both a macro and corporate level and continue to invest for the longer term. We do, however, fully expect markets to remain more volatile than they have been throughout most of 2021. The portfolios are well diversified and not reliant on one par-ticular investment style, especially as significant market rotations are likely to remain a factor in the near term.

Volatility has remained high in the bond markets as investors try to take account of a more hawkish Federal Reserve at a time when Covid-related uncertainty has risen. Our base case scenario is still for yields to gradually increase in the months ahead and our overall duration risk is low. Our focus is on high-yield credit, senior secured loans, convertible bonds, as well as emerging market corporate debt.

MARKETS TO REMAIN CHOPPY AS UNCERTAINTY RISES AND FED TURNS MORE HAWKISH

Portfolio Activity/ News

After getting off to a strong start, November turned out to be a negative month for portfolios. US Small Caps, European Value, the CTA trend-following strategy, the Multi-thematic fund, EM growth and healthcare equities were the main detractors. On the positive side, the best contributions were provided by the global technology fund, US growth, metal mining equities, and the Japanese growth exposure. For non-USD denominated portfolios, the appreciation of the dollar was also a positive contributor. Most fixed-income positions ended the month with modest variations, except for the EM corporate debt fund which extended its decline observed since the end of August, in large part due the crisis in the Chinese real estate sector. The fund remains a top performer within its peer group over different periods, nevertheless, and the manager is confident of the opportunities ahead. We consider this position to be the one providing the most potential within the fixed-income asset class.

Apart from the CTA strategy, other hedge funds were stable and showed their usefulness within the portfolios. The poor performance of the trend-following strategy was the result of the sudden reversal of bond yields, weaker equities and a widening of credit spreads. This kind of return pattern is well understood and is to be fully expected when well-entrenched trends reverse brutally. Were these trends to invert more permanently, this systematic strategy would then adjust its exposures accordingly. End

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Newsletter | November 2021

A SOLID Q3 EARNINGS SEASON UNDERPINS THE EQUITY MARKETS

+ 5.4% A STRONG MONTH FOR THE MSCI WORLD IN OCTOBER

Investment perspective

Global equity markets performed strongly in October under the leadership of US equities. The MSCI World Index in local currencies rose by 5.4%, with the S&P 500 climbing by 6.9%, but emerging markets and Japanese equities did not take part in the rally. The Brazilian equity market was particularly weak, on concerns over excessive public spending plans, whereas Japanese equities were also under pressure ahead of October 31 general elections. It was a quite volatile month for bond markets, with early-month rises of sovereign debt yields followed by a partial unwinding, at least on the longer end of the curves; this was due in part to big swings in inflation expectations. The yields of 10-year US Treasuries rose by 6bps in October but 2-year ones ended the month 20bps higher, resulting in a much flatter curve. There was also a lot of action within the commodity markets, as energy prices extended their rally and divergent trends were observed on industrial metals.

With 82% of the S&P 500’s market cap having reported, 79% of the companies have beaten earnings’ estimates and 72% revenue estimates. Overall, third-quarter earnings are beating expectations by 10.5% and revenues by 2.9%. The results of European companies have also surprised positively, even if to a lesser degree. However, both regions are producing similar earnings per share (EPS) growth of above 35% year on year. These solid corporate results have contributed to reassure investors which had lowered their expectations ahead of this reporting season. As a result, equity markets have rebounded strongly and appear to be on a firmer footing again. The fact that profits have proved to be resilient despite rising costs, and that fewer companies than feared have warned on future profits, has definitely boosted the equity asset class.

Investment strategy

As many investors, we have been comforted by the ongoing reporting of Q3 corporate results. The portfolios’ overweight equity allocation is benefiting from the current strength of equity markets. Even if bond markets appear to increasingly disagree with the timeline of interest rate hikes by the ECB and the Federal Reserve, this has not triggered any negative reaction by equity markets so far. The Fed’s announcement following its FOMC November 2-3 meeting that it would start reducing its purchases this month was well flagged and taken in its stride by markets. Concerns over persistent high levels of inflation have not disappeared but, as long as they do not become the main drivers of markets, equities should remain the asset class of choice.

It has been interesting to observe that the price of gold has appreciated in October despite the pressure on bond yields. This likely reflects the fact that gold is considered as a good hedge against inflation in view of rising expectations. We also anticipate other positions in the portfolios such as the mining equities and the fund investing into real assets to represent good hedges against higher inflation.

RECENT VOLATILITY WITHIN BOND MARKETS HAS NOT IMPACTED EQUITIES SO FAR

Portfolio Activity/ News

October was a very positive month for the portfolios, mainly thanks to the strong performance of many equity funds. The multi-thematic fund, European small caps, frontier markets, and mining equities provided the best contributions; the European value fund also continued to perform well and we much like the way the fund is positioned. As in September, most fixed-income funds ended the month little changed. Our emerging market corporate bond fund had a negative month, however, in part due to a difficult market for Chinese corporate bonds. Other negative contributions were far and few between, but included our UK equity fund and another one investing into Japanese equities. In the alternative space, the CTA fund performed well, whereas the other strategies were mostly stable.

One of the challenges ahead of us will be the replacement of some of the portfolios’ long-only equity exposures by less directional strategies, especially as the fixed-income asset class is still very unattractive. Our search for new funds is therefore currently more focused on liquid hedge funds, with long/short credit and convertible arbitrage being some of our main interests at the moment.

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Newsletter | October 2021

THE EQUITY MARKET RALLY COMES TO A HALT IN SEPTEMBER

+ 70% DUTCH GAS PRICES SPIKE IN SEPTEMBER

Investment perspective

September confirmed its reputation for being the stock market’s worst month as global equity markets gave back some of their strong gains for the year. The MSCI World Index in local currencies dropped by 3.8% and, with the exception of Japanese equities, the drop of equity markets was widespread. Investors had to face a number of issues, including rising inflation pressures, the Fed’s more hawkish stance, the collapse of the Chinese property group, Evergrande, supply chain disruptions and concerns over the US debt ceiling negotiations. Rising bond yields were another headwind for equities as the yields of 10-year Treasuries and Bunds rose by close to 20bps. In this risk-off environment, it was not surprising for the US dollar to appreciate strongly. Finally, quickly rising energy prices also weighed on market sentiment; the price of a barrel of WTI jumbed by 9.5% during the month, with gas prices climbing at an even faster rate.

Following the September FOMC meeting, Federal Reserve Chairman Jerome Powell did not announce when the US central bank would pare back its bond purchases. Powell did indicate that tapering “may soon be warranted” and markets now expect the Fed to set out its plan at its November meeting. That is likely dependent on Washington issues being resolved however, as tensions around the debt ceiling, the budget resolution and potential for a government shutdown remain high. Nevertheless the Fed’s latest stance was considered to be more hawkish as was that of the Bank of England. This pushed bond yields higher and added to the angst of equity markets during the past month. In contrast, the communication from the ECB has tended to remain more dovish and its President Christine Lagarde promised not to “overreact to the transitory supply shocks” and to “continue providing the conditions to fuel the recovery”.

Investment strategy

The summer ended on a weaker note for equity markets as the month of September erased the gains that had been rec-orded in July and August. So far, we have not made any changes to our portfolio positioning. We deem the recent movement to be a normal behaviour of equity markets after a period of strong gains with no significant drop. We observe that markets have become more nervous and more prone to sudden changes, but we still consider fundamentals to be supportive, even if further equity gains are likely to be more challenging. We will pay close attention to the upcoming earnings’ reporting season. Rising commodity prices and shipping costs are amongst the risks that could impact profit margins and companies’ outlooks will also have to be closely monitored. Our equity allocation remains overweight, but we would not hesitate to act if necessary.

Concerns over the risk of persistent inflation are rising and this has recently impacted the level of yields. As a reminder our overall duration risk is low, and our credit strategies have fulfilled our expectations so far this year; spread tightening and carried interest have more than compensated the rise of bond yields observed in 2021.

VOLATILITY IS ON THE RISE AS MARKETS TURN MORE FICKLE

Portfolio Activity/ News

Following an extended period of positive monthly returns, September was a negative month for the portfolios, mainly due to weaker equity markets. Mining equities, European small caps, the CTA fund and a number of other equity funds were the worst detractors. A few equity funds did manage to end the month with positive performances, in particular a Euopean value fund and frontier markets’ equities. Most fixed-income funds ended the month flat, despite a trend of rising yields, as did the other alternative strategies. For non-USD portfolios, the US dollar was a positive contributor.

The European value fund was an outlier in September as its positioning enabled it to generate a positive return despite the challenging equity markets. The fund has significant exposures to financials and energy as the manager sees considerable upside for these sectors in view of record low valuations and upside inflation risks. The fund has proven to be a good portfolio diversifier due to its composition and to the manager’s longstanding conviction over higher inflationary pressures.

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Newsletter | September 2021

A SEVENTH STRAIGHT POSITIVE MONTH FOR GLOBAL EQUITIES

+ 20.4% THE YTD PERFORMANCE OF THE S&P 500 INDEX

Investment perspective

Global equity markets extended their relentless winning run, as they recorded their seventh straight positive month in August. Despite a short mid-month wobble, equities confirmed their resilience to bad news, which included a resurgence of Covid-19 cases, concerns over the Fed’s tapering plans, the ongoing regulatory crackdown of Chinese companies, and a most dramatic withdrawal of US forces out of Afghanistan. The MSCI World Index in local currencies gained 2.5%, with the different regions posting quite comparable performances, thanks to a late-month rebound of emerging markets. G7 bond yields ended the month higher after initially dropping, with 10-year Treasuries even trading briefly below 1.20%. August was a very volatile month for commodities, with industrial metals being under severe pressure and oil prices only recovering part of their early-month losses over concerns about weaker demand.

The key event for markets in August was the much-awaited speech of the Federal Reserve’s chair, Jerome Powell, at the Jackson Hole symposium. Investors were looking for clues on when the tapering of the central bank’s monthly purchases might begin. Powell delivered a trademark speech where he soothed both equity and bond markets, which ended August on a strong note. Powell remained unclear about when tapering would begin and devoted much time to why he feels current high inflation is likely to pass. He also emphasized that the first rate increase was not linked to the scaling back of bond purchases. As a reminder, the Fed is currently buying $120 billion in monthly purchases ($80 billion in Treasuries and $40 billion of agency MBS), and tapering means that the bank’s balance sheet will continue to expand, but at a slower pace than currently.

Chinese internet companies have had a rocky ride since they reached a peak in February. A wide-ranging number of announcements have been made by the Chinese government over the recent period, with “Common Prosperity” being highlighted as its core policy objective. Key sectors including internet, education and real estate were hit particularly hard. Even if some individual companies had already come under pressure a year ago, investors have been spooked by the speed and the scope of China’s government’s latest offensive.

Investment strategy

The summer has turned out to be very profitable for the portfolios as equity markets have continued to grind higher, in part thanks to outstanding 2Q earnings and abundant liquidity. The Federal Reserve has opened the door to maybe begin to taper its monthly purchases before the end of the year, but markets seem relaxed about this perspective. We have maintained our overweight equity exposure, but some trimming has taken place. We also increased our allocation to alternative investments to the detriment of fixed income. We think that it makes sense to diversify the portfolios further by adding a market neutral strategy and by reducing some of the inherent asymmetrical risk of high yield bonds.

The equities of frontier markets have been one of the best contributors year-to-date. The fund we selected is outper-forming its benchmark by a wide margin. The upside for the fund’s portfolio remains very attractive as it is trading at only 9.7x 2022 earnings. The fund’s manager is forecasting 24% earnings growth for 2022 versus consensus forecasts of 7.5% for both emerging markets and for the MSCI World Index.

THE EQUITIES OF FRONTIER MARKETS ARE ONE OF OUR FAVOURITE POSITIONS

Portfolio Activity/ News

August was another positive month for the portfolios, mainly thanks to the strong performance of the equity asset class. European small caps, Japanese and UK equities as well as the multi-thematic and technology sector funds provided the best contributions; our European positive impact fund also made a good contribution. Within the fixed-income asset class, contributions were modest with the exception of the EM corporate debt fund which continued to perform well. The worst detractors were the mining sector fund and the Greater China fund which was impacted by the crackdown on several Chinese sectors.

In the summer, we added another alternative solution to our list of approved funds. This Event Driven fund focuses on mergers and acquisitions and mainly invests in announced deals, including non-US and smaller cap ones. The fund’s track-record has been strong and consistent, with limited drawdowns; the fund dropped by less than 5% during the March 2020 market correction. The fund was added to the model portfolio to reduce market beta as the strategy has a very low correlation to other asset classes. We also boosted the allocation to the Global Macro fund after cutting one of our European high yield positions.

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Investment Perspectives 2021 | Mid Year review & Outlook

Executive Summary

The economy is largely recovering as expected

Eighteen months after the onset of the Covid-19 pandemic, the global economy is experiencing its most robust post-recession recovery since World War II. The rebound is, however, very uneven across countries, as major economies are faring much better than many developing ones. Some countries have nearly lifted all their restrictions while others remain constrained by a resurgence of Covid-19, or by the fast spreading of the Covid-19 Delta variant. According to the World Bank, global growth is expected to accelerate to 5.6% this year, in large part thanks to the strength of the US and China. The level of global GDP in 2021 is still expected to be around 3.2% below pre-pandemic projections, despite this year’s recovery. For the remainder of the year, the outlook looks favourable for the US and for Europe but more complicated for the Asian region.

Fiscal stimulus continues to be supportive

Monetary support has reached its peak, but it is still massive, however fiscal support will continue to significantly impact economies in the years ahead. As in the case of vaccine rollouts, fiscal support has been very uneven across the different regions and the recovery is set to be unequal between countries, with developing economies forecasted to take longer to regain their pre-pandemic activity levels. Advanced economies have already benefited from much larger fiscal packages and they will continue to do so in the future. In Europe, the recovery plan is significant in size, while the different US relief bills have already amounted to more than a quarter of US GDP. An additional $1.2 trillion US infrastructure bipartisan plan is on the brink of being approved, while a separate bill designed to fund key Democrat priorities could also be pushed through the reconciliation process. All this to say that fiscal stimulus is far from being exhausted.

The second half likely to be more challenging for financial markets

Financial markets have been rewarding so far this year, mainly thanks to the contributions of equities, emerging market debt and high-yield bonds. Volatility has also been trending lower in a context of strong appetite for risk assets. The quarters ahead, however, are likely to produce more modest returns for the portfolios and the risks of higher volatility are rising. In view of elevated inflation risks and our expectations of higher bond yields, our fixed-income exposure has an overall low duration risk and a very underweight allocation to investmentgrade bonds. We still believe that it is too early to go into an overly defensive mode, hence our significant exposure to risk assets. The markets’ focus will continue to be on inflation risks and on the Federal Reserve’s communication as to how and when they will start to withdraw some of their support to the markets. Were high levels of inflation to persist, the pressure on the Fed will only keep increasing and markets could lose some of their serenity.

We maintain a dynamic positioning of the portfolios

Our portfolio positioning remains dynamic with an overweight towards equities, a low level of cash and a fixed-income allocation which is focused on emerging market debt, high yield credit and convertible bonds. Our equity allocation is well diversified across investment styles, regions, and market capitalisations. Our assessment is that European and UK equities still offer significant catch-up potential, and we are also confident about the capacity of our Japanese equity exposures to bring worthwhile contributions to the portfolios in the quarters ahead. The main driver of credit performance will be carry as further spread compression will be limited, and we expect convertible bonds to perform better, in relative terms, than during the first semester. In the next section of the document, we will evaluate the macro environment and the prevailing financial conditions by highlighting several key indicators that we observe. Following a brief overview of the first half returns of the different asset classes, we will outline our current market outlook and asset allocation.

 

Table of contents

  • EXECUTIVE SUMMARY
  • THE MACRO ENVIRONMENT
  • FINANCIAL CONDITIONS
  • FINANCIAL MARKETS 
  • MARKETS' OUTLOOK
  • ASSET ALLOCATION 2nd HALF 2021

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