Newsletter | June 2021

GOLD PRICES RISE BY 7.8% IN MAY

+ 4.2% HEADLINE US CPI SPIKES TO A 13-YEAR HIGH

Investment perspective

In May equity markets added modest gains to the strong returns recorded during the previous months. The dispersion of performances between regions and investment styles was less pronounced than observed previously, even if growth stocks lagged again. Markets were dominated by inflation concerns and, somewhat surprisingly, equities proved to be much more volatile than bonds, even if higher levels of volatility proved fleeting. Commodity markets extended their rally, with gold prices making up all of their early-year losses and oil prices continuing to rise. In forex markets, the dollar continued to depreciate further against most currencies, with the EUR/USD parity rising by 1.7%, thus bringing it back to its end-2020 level.

Inflation data were much discussed during the past month and were also a source of market volatility, for growth stocks in particular. US headline CPI in April rose by 4.2% year-on-year, its highest level since September 2008, and well above forecasts of 3.6%. Rising inflation expectations have raised the question of whether the Federal Reserve would be forced to adjust its monetary policy sooner than currently anticipated. The Fed unveiled a new policy framework last year, whereby it would be targeting average inflation of 2% rather than a set target of 2%, as previously. This new approach allows the central bank to tolerate higher inflation temporarily, especially as its current priority is a strong job market over inflation fears. The Fed has been adamant that higher inflation would be transitory only and not structural, but it is premature to come to any definitive conclusion on this issue. Bond markets reacted very calmly to the high inflation numbers, however, and seem prepared to trust the Fed, at least for the time being. There is no doubt that it will be very challenging for the central bank to communicate any change of its monetary policy without upsetting the markets.

Investment strategy

Equity markets have continued to grind higher even if a rising number of investors appear to be having doubts about the sustainability of the rally. The main market concerns include higher inflation risks, the need for the Federal Reserve to open discussions on tapering and the fact that markets have already priced in a lot of positive news. We agree that a lack of near-term catalysts could result in some consolidation for equity markets following their strong start to the year. We have, however, been somewhat reassured by the bursting of several market bubbles and we continue to observe cheap valuations across some sectors and regions. Our allocation to equities is diversified and well suited to market rotations.

We continue to be exposed to convertible bonds. Following an outstanding performance in 2020, the asset class has been more challenged this year for several reasons, including cheaper volatility, rising interest rates, weakness of growth sectors and excessive new issuance. We are confident that the asset class remains attractive as valuations are below their long-term average, new issuance offers new thematic opportunities and it is a portfolio diversifier.

CENTRAL BANKS ARE UNDER INCREASING PRESSURE

Portfolio Activity/ News

May was a positive month for the portfolios, mainly thanks to the strong performance of gold and to the value investment style. Excluding gold, the best contributions were provided by frontier markets, European and UK value, mining equities as well as emerging market corporate debt. Generally speaking, it was a quiet month for fixed-income assets which produced only marginal contributions. The worst detractors were US Growth Small Caps and one of our Japanese equity funds. So far this year, we continue to observe an outperformance of last year’s laggards while the opposite is true for the biggest alpha generators in 2020.

In the past month, we took advantage of the correction of our multi-thematic fund to boost its allocation. With its exposure to growth stocks, the fund has had a challenging start to 2021 but the medium to long term drivers of the strategy remain compelling. We also increased our mining equities position in view of attractive valuations and as a hedge against rising inflation risks.

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Newsletter | May 2021

1Q EARNINGS HAVE BEEN WELL ABOVE ESTIMATES + 8%

A STRONG MONTH FOR THE CRB COMMODITY INDEX

Investment perspective

Equity markets posted strong performances in April as long-term Treasury yields retreated and first-quarter earnings largely beat analysts’ estimates, on both sides of the Atlantic. US stocks outperformed, whereas Japanese equities ended the month lower. In a reversal of the trends observed in March, long-term US Treasury yields declined while those of Bunds moved higher; 10-year Treasury yields dropped by 11bps to end April at 1.63% while same-maturity Bunds saw their yields rise by 9bps to - 0.20%. This tighter yield spread was one of the drivers for the strong appreciation of the euro against the US dollar, with a monthly gain of 2.5%. The best performing assets, by a wide margin, were commodities, including a rebound of gold prices.

With 85% of the S&P 500’s market cap having reported, 86% of the companies have beaten earnings’ estimates and 74% revenue estimates. These beat numbers are well above historical averages and also reflect a higher-than-expected year-on-year rebound. This trend is well entrenched and analysts have continued to upgrade their estimates for the next quarter and for the whole of 2021. At a time when valuations are stretched, it was comforting for markets that results did not disappoint as a lot of positive news has already been discounted. The numbers announced by the mega-cap companies were also very noticeable as they spectacularly surpassed expectations. Alphabet, Amazon, Facebook and Apple were some of the stockmarket’s giants whIch outperformed during the month, on the back of these publications.

As expected, the meetings of the ECB and the Federal Reserve did not result in any negative surprises for the markets. The ECB has effectively increased the pace of its asset purchases and it also refrained from discussing a possible phasing out of its stimulus during its April meeting. On its side, the Federal Reserve reaffirmed its ongoing commitment to a very accommodative policy and indicated that it was too soon to consider curbing its assets’ purchases.

Investment strategy

We did not change the composition of our model portfolios in April, which enabled them to benefit from the extension of the equity rally as well as from tighter credit spreads. The positive trend for risky assets continues to be supported by strong earnings’ growth and economic data which has been increasingly pointing towards a more synchronized economic rebound in the months ahead. In the current environment, we continue to believe that cyclicals, small caps and value stocks should perform well. Even if year-to-date returns of most equity markets have been strong, and valuations have remained expensive, this should not preclude further gains as the market continues to present pockets of value.

We consider that it is premature to adjust our fixed-income allocation as we continue to favour emerging market debt, high yield credit and convertible bonds. Our investment grade exposure remains very underweight and we will wait until long-term yields have become more attractive before considering an increase of this market segment.

EQUITY MARKETS STILL PRESENT POCKETS OF VALUE

Portfolio Activity/ News

April was a strong month for the portfolios, mainly thanks to the equity asset class; other positive contributions were produced by gold, alternatives, convertible bonds, credit and emerging market corporate debt. The best contributions were provided by small caps in the US and in Europe, US growth equities, UK equities, a Medtech fund as well as the mining equities’ fund into which we recently invested.

The number of detractors was very limited; they included two bond funds with a long duration as well as Japanese equities. The weaker US dollar was also a detractor for non-USD portfolios, but our underweight exposure helped to limit the negative impact of its depreciation during April.

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Newsletter | April 2021

VOLKSWAGEN’S POWER DAY CONVINCES INVESTORS

+ 7.8% A STRONG MONTH FOR THE EURO STOXX 50

Investment perspective

Equity markets performed well in March despite the headwind represented by rising long-term Treasury yields. European equities outperformed, with the Euro Stoxx 50 climbing by 7.8%, whereas emerging markets struggled as the prices of Chinese mega-caps continued to slide. US Treasury yields extended their early year rise, in contrast to those of Bunds; 10-year Treasury yields increased by 34bps to end the month at 1.74% while same-maturity Bunds saw their yields drop by 3bps. The Fed’s lack of action diverged significantly from the more pro-active stance of the ECB. March was also a strong month for the dollar which benefited from the widening interest rate differential and the faster growth prospects for the US economy.

Even if developed equity markets ended the month with strong returns, it wasn’t all plain sailing. Growth stocks got off to a poor start as the Fed’s chair, Jerome Powell, failed to alleviate fears over rising yields and higher inflation expectations. He tended to downplay the rise in yields as he did not consider it to be “disorderly” and did not provide any indication that the central bank would be pushing back against the ongoing trend. Powell also insisted that he sees inflation pressures as being transitory and that the Fed would be patient before starting to hike rates. On its side, the ECB took a different approach as it stepped up the weekly pace of its emergency bond-buying programme to its highest level for over three months. This action contributed to rein in the rise of Eurozone bond yields and reassure investors of the bank’s ongoing support.

The Volkswagen Group presented its technology roadmap for batteries and charging up to 2030 during its first Power Day on March 15. The company will invest into six EV Battery “Gigafactories” which will be established by the end of the decade. It will also pursue the expansion of the public fast-charging net-work globally to make the electric car attractive and more viable as it ramps up its production of electric vehicles. The prices of Volkswagen preferred and ordinary shares rocketed following these announcements, rising by 44% and 60% respectively during the month of March.

Investment strategy

We remain committed to our overweight equity allocation. The rise of bond yields appears to have paused and strong economic data is supporting our positive economic outlook for the quarters ahead. We still consider the equity asset class to offer the best risk/reward and we are positioned accordingly. Our fixed income allocation, focused on the more dynamic segments of the market, has proven to be very resilient in view of the rising bond yields; emerging market debt, high yield, convertible bonds and senior secured loans represent our key exposures in this asset class. We also view the recent appreciation of the dollar as temporary and the dollar allocation for non-USD portfolios is still underweight. Despite a disappointing performance of gold prices since the beginning of the year we continue to hold a position in the precious metal as a source of diversification and as a hedge against the more extreme market risks.

In March we increased our equity exposure by adding a new equity fund investing into mining equities. This investment allows the portfolios to be more exposed to the commodity space, with a special focus on speciality metals. The demand for metals such as cobalt and lithium as well as industrial metals such as copper should remain sustained, as it is driven by transformative changes of the global economy and huge infrastructure investments.

THE RALLY OF RISK ASSETS APPEARS LIKELY TO CONTINUE

Portfolio Activity/ News

March was a positive month for the portfolios thanks to the performance of most equity positions. The best contributions were provided by both Value and Growth equity funds as the rally broadened across different investment styles. Additional contributions were provided by the aternative strategies whereas the China equity fund had a disappointing month, as did an EM fund investing according to a Growth approach. Our long duration bond fund also ended the month with a modest negative performance due to the impact of rising long-term Treasury yields.

We approved three new funds during the past month. The first one invests into a range of mining equities, including both gold and speciality metals’ miners, in particular those needed for the improvement of battery technology, for the production of electric vehicles and for the decarbonisation of the economy. This strategy fully integrates a wide range of ESG considerations as part of its investment process. The other two funds invest according to an “Impact” approach. Their objective is to invest into companies that provide solutions to the current challenges faced by the planet, as defined by the United Nations’ 17 Sustainable Development Goals (SDGs). These funds invest across environmental and societal themes, including the circular bio-economy, the transition to less wasteful economies as well as fairer ones. Both funds are run by leading asset managers which benefit from a high level of expertise and extensive resources in this domain. At a time when a lot of “greenwashing” is taking place in the industry of finance, it is even more critical to select these types of investments most diligently.

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Newsletter | March 2021

THE 10-YEAR BTP-BUND SPREAD DROPS BELOW 1%

1.50% A SUDDEN SPIKE OF 10-YEAR TREASURY YIELDS

Investment perspective

Equity markets performed well in February even if they did end the month off their highs due to the negative impact of fast-rising bond yields. European equities outperformed US and EM ones, in large part thanks to a powerful rotation out of last year’s winners into value and cyclical stocks. The rise of bond yields gathered steam during the month in reason of higher inflation expectations; with US yields climbing at a faster pace, the dollar appreciated. In this environment, gold prices were under constant downwards pressure as they dropped by more than 6% for the month. Other commodities, however, continued to benefit from expectations for a strong economic recovery and for a solid demand related to infrastructure projects. Oil prices rose by close to 18% and industrial metals such as copper, zinc and aluminum rocketed.

The factor rotation was very much in evidence during the past month. Last year’s unloved sectors, financials and energy in particular, have been the winners so far in 2021 to the detriment of growth stocks and long duration assets. The rapid rise of long-term bond yields has had a disproportionate impact on highly valued stocks while the steepening of the yield curve has contributed to the rebound of the financial sector. Small caps have also outperformed large ones, at times significantly; in the US, the Russell 2000 Value index was up by 14.9% at the end of February, compared to a modest gain of 1.5% for the S&P 500. With the strong rise of commodity prices, these market trends are to be expected ahead of a cyclical economic rebound.

The swearing-in of former ECB President, Mario Draghi, as the new Italian prime minister was well received by investors, unsurprisingly. The 10-year BTP-Bund yields’ spread dropped to a low of 0.9% from a high of 1.22% in January. His appointment will contribute to reduce the level of risks within the eurozone in view of Italy’s massive debt burden.

Investment strategy

We do not believe that the rise of bond yields represents a major threat for equities at this stage. Even if the ECB and the Federal Reserve have failed to fully reassure investors about their commitment to push back against higher yields, their policies will remain very accommodative. Higher bond yields are reflective of optimism about the outlook in anticipation of the reopening of economies. A stabilisation of yields would support risky assets, and this remains our preferred scenario. We therefore maintain our overweight equity exposure and our overall low duration fixed income positioning. Our invest-ment grade debt allocation is very underweight, and we do not expect to increase it in the near term, as we continue to favour the more dynamic segments of the market.

The ongoing rotation towards pro-cyclical stocks is likely to be extended in the current market environment. Even if the rollout of vaccines across Europe has disappointed, other countries have been faring better and markets continue to look beyond the current headwinds. The recent strength of the US dollar is also more likely to fade and our positioning for non-USD denominated portfolios is still underweight.

A FURTHER RISE OF YIELDS COULD THREATEN THE EQUITY RALLY

Portfolio Activity/ News

February was a positive month for the portfolios, mainly thanks to the performance of equity positions. The best contributions were provided by equity funds investing according to a Value approach across a number of regions, including frontier markets. All alternative strategies also contributed positively to the return of the portfolios. Growth equity funds, Chinese equities and bond funds with longer duration proved to be the main detractors. Finally, the stronger US dollar boosted the performance of EUR and CHF denominated portfolios.

The recent period has shown that markets have become increasingly prone to sudden trend reversals. It is therefore illusory to believe that one can continuously react to these shifts by adjusting the portfolios’ positioning. That is why we have a broad diversification across regions, investment styles and market capitalisations. As an illustration, we maintained our exposure to value funds and to frontier markets last year despite their significant underperformance at the time. Over the last quarters, value funds have been performing strongly whereas our frontier markets fund has had a solid start to 2021. This results in large part to its exposure to Vietnam, which is up by over 31% YTD at the time of writing.

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Newsletter | February 2021

US Q4 2020 EARNINGS ARE WELL ABOVE FORECASTS

+ 1’625% THE JANUARY GAINS OF GAMESTOP, THE MOST TALKED ABOUT STOCK IN 2021!

Investment perspective

Equity markets got off to a good start in 2021 but ended January on a much weaker note. This weakness resulted mainly from concerns over the rollout of vaccines and from hedge funds slashing their exposures in a wave of volatility. The MSCI World Index in local currencies dropped by 0.8%, with Asian markets outperforming under the leadership of mega-caps such as Tencent, Alibaba or TSMC. Government bond markets also ended in negative territory; the yields of 10-year Treasuries climbed from 0.92% to 1.07% as markets priced in higher US federal spending and inflation expectations. This was triggered by the Democrats’ win of both remaining Senate seats in the January 5th Georgia run-off. With 50 senators on both sides of the aisle, the deciding vote of Vice-President Kamala Harris gives the smallest of majorities to the Democrats, boosting their chances of passing larger fiscal stimulus.

The 4Q 2020 earnings season is in full swing and 65% of the S&P 500's market cap have reported their results, at the time of writing. Earnings have surpassed estimates by 18.5% in aggregate, with 81% of companies beating analysts’ projections. Revenues have also beaten estimates by an average of 3.2%, with 74% of companies announcing positive surprises. These results did not represent such a strong support for equity markets, however. Many companies beating both on revenues and earnings underperformed the market, surprisingly. This muted reaction was likely due to cautious outlooks amid an economic environment which still remains uncertain.

The late-month underperformance of European equities can be explained, in part, by the negative developments relative to Covid-19. A disappointing start to the vaccination rollout, tighter restrictions and vaccine supply issues all contributed to dampen optimism over the reopening of economies.

Investment strategy

Our core scenario targets a strong economic rebound from the second quarter onwards and we have positioned the portfolios accordingly. Our equity allocation is overweight, and our fixed income exposure is focused on the dynamic segments of the market. We like emerging market debt, high yield credit and convertible bonds, whilst investment grade bonds are heavily underweight. Hedge funds and gold are the main portfolio diversifiers, and the level of cash is low. For non-USD portfolios, the dollar exposure is underweight.

Within the equity allocation, we have a broad diversification across regions, investment styles and market capitalisations. Equity markets are increasingly skittish and last year proved that even well-entrenched trends can reverse on a dime. That is why we remain allocated to both Growth and Value styles, with Value benefiting from depressed valuations, both on a relative and an absolute basis. From a regional perspec-tive, we have reinforced our China exposure and continue to favour emerging and Japanese markets. Finally, we are still exposed to Frontier markets which offer significant catch-up potential in view of low valuations and solid fundamentals.

MARKETS ARE AT RISK FROM A SLOW VACCINE ROLLOUT AND NEW VIRUS VARIANTS

Portfolio Activity/ News

January ended up being slightly negative for the portfolios in spite of a good start to the year. The number of contributors and detractors was split down the middle. The main equity contributions were provided by Chinese equities, US Small Caps, the multi-thematic fund and emerging markets; value funds were the main equity detractors. In the fixed income allocation, high yield and emerging market debt generated gains whereas investment grade funds detracted from the performance.

After a long hiatus, we have reinitiated a position in UK equities. We had neutralized our exposure to UK assets in view of elevated political uncertainty following the Brexit vote. This has proven to be a wise decision as UK equities have underperformed significantly over the last years. The UK is now, however, the most underweight region globally by asset allocators; the discount of UK equity market valuations relative to the rest of the world is also close to record levels. These factors are just some of the reasons that could trigger a catch-up of the UK equities in the year ahead. We have invested into a fund that we have known for a long time; its strategy is based on a value approach and on active management.

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Newsletter | December 2020

GROWTH UNDERPERFORMS VALUE BY MOST SINCE 2001

+ 18.1% NOVEMBER WAS A RECORD MONTH FOR THE EURO STOXX 50

Investment perspective

November was a record-breaking month for global stockmarkets. The MSCI World Index in local currencies surged by 11.8%, its best month since it was created in 1990. European markets outperformed, with the Euro Stoxx 50 Index rising by 18.1%, while US markets hit record highs. The positive vaccine announcements by several pharmaceutical companies were the key drivers for the strength of the equity markets. The appetite for risky assets was also reflected by much tighter credit and emerging market debt spreads, higher commodity prices and a depreciation of the US dollar. The price of gold weakened by 5.4% as demand for defensive assets subsided, even if sovereign debt yields ended the month with relatively limited changes.

The series of Covid-19 vaccine breakthroughs and Joe Biden’s victory in the US presidential election removed two quite significant tail risks from the market. Anticipations of a rapid economic rebound in 2021 were a major boost for the stocks of companies having been the worst affected by tight restrictions to limit the spreading of the virus. This was reflected by the rotation into the more cyclical sectors and by an outperformance of small caps. Markets also responded favourably to the outcome of the US elections as a still to-be-confirmed divided Congress should prevent radical reforms. The election of Joe Biden was also perceived as positive for international relationships and for global trade following a period of unpredictability and elevated tensions during Donald Trump’s presidency.

Optimism over a strong economic recovery was best reflected by the rally of oil in anticipation of higher demand for fuel products. WTI oil prices rose by over 26% during the past month to reach a level of $45 per barrel compared to $50 before the correction that took place in March and April.

The ongoing underperformance of the Value style compared to Growth has been well covered. As shown above, the MSCI Europe Value index has lagged the MSCI Europe Growth index in most of this year’s months. In November however, European value stocks made a spectacular comeback as they out-performed European growth ones by close to 11%, in large part the result of positive Covid-19 vaccine announcements. Banks, energy and automobiles were some of the best performing sectors.

Investment strategy

Our concerns over a potentially volatile period have proved to be unfounded as equity markets rallied in a spectacular fashion during November. The portfolios benefited from their broad diversification again as the largely out of favour value positions contributed the most during the past month. 2020 will be remembered for many reasons in the capital markets, but the speed at which market factors have changed during certain periods has been breath-taking. Our equity exposure is back to being overweight as a result of a new investment and of market performance. While we continue to be wary of the current valuations of equity markets, other driving forces are overwhelming and likely to push prices even higher.

Within fixed income, we consider emerging market debt to be one of the most the attractive asset classes and we have reinforced our exposure into EM corporate bonds. Emerging market assets should benefit from inflows, the depreciation of the dollar as well as from the cyclical recovery in 2021.

MARKETS ARE DRIVEN BY AN ANTICIPATION OF WIDESPREAD VACCINATION PROGRAMMES

Portfolio Activity/ News

November was a strong month for the portfolios, with all the underlying positions, except gold, producing positive monthly returns. The highest contributions were provided by funds managed according to a value approach. One European fund gained 27% as it benefited mainly from its exposure to banks and oil. All European funds contributed well as did the US Value fund, the Japanese funds, and Small Caps overall. Within fixed-income, EM corporate debt, high yield and convertible bonds were the outperformers, while equity long/short was the best alternative strategy. The detractors proved to be gold and the US dollar for non-USD portfolios.

Towards the end of the month, we invested into a new fund focused on real assets. The fund’s types of assets include infrastructure, specialist property, renewables and other alternatives such as music royalties. These kind of assets benefit from well-defined income streams and long-term contracts. This investment solution can be characterized by its resilience, low volatility and low market beta.

The latest addition to our list of funds is a long/short credit fund primarily investing into US high yield corporate bonds. The manager has demonstrated his ability to protect the portfolio during market drawdowns as well as to capture a large part of the upside of the asset class. The prevailing market conditions appear as well-suited for this type of investment approach.

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Newsletter | November 2020

THE EUROZONE SERVICES PMI DROPS TO 46.9 IN OCTOBER

- 31% THE PLUNGE OF SAP’S SHARE PRICE IN OCTOBER

Investment perspective

October stood up to its reputation of often being a volatile month for equity markets. Following a positive first half, most equity indices took a turn for the worse and ended the month with losses. European markets underperformed, with the region’s economic outlook being hurt by the introduction of much tougher restrictions to fight against a surge of coronavirus cases. The Euro Stoxx 50 plunged by 7.4% compared to a 3.1% drop for the MSCI World Index in local currencies; emerging markets outperformed strongly as they recorded a 2% monthly gain. Oil prices were hit by demand concerns and fell by 11% over the month. Credit and emerging spreads were stable whereas Bunds and the US dollar logically benefited from their safe haven status.

Markets had to contend with a rising level of uncertainty towards the end of October and volatility levels ended the month considerably higher. On top of the looming issue of the November 3rd US general elections, the hopes for another US fiscal stimulus were dashed and European governments had to react vigorously to the fast spreading of the pandemic. Also, a better-than-expected Q320 earnings reporting season failed to provide additional support for the markets as a lot of good news had already been discounted. The Asian region continued to be the brighter spot for equity markets in reason of its solid economic recovery and a limited impact of the coronavirus pandemic.

At the time of writing this newsletter, results from the US election are yet to deliver a conclusive outcome and the counting of votes could take longer than normal due to an above-average number of postal ballots. Markets have thus far reacted with calm despite the threat of protracted judicial battles by both sides. This reaction could be explained by the likelihood of a divided Congress, meaning that the potential for significant changes to tax policy and to the reg-ulatory framework for sectors such as financials and energy may be reduced.

Investment strategy

As we had expected, equity markets have proven to be more volatile during the recent weeks in large part due to factors mentioned previously. This has translated into increasing concerns about the pace of the economic recovery, in Europe in particular. Several countries have reintroduced lockdowns, and even if they are not as strict as during the spring, they will be detrimental to the near-term economic outlook. In the light of elevated uncertainty, we have reduced our equity exposure back to neutral and boosted our cash position. With the portfolios continuing to hold some protection by way of a January Put spread, we feel well positioned to face a period where volatility could remain well above average.

Within the equity allocation, the exposure to Asia remains overweight and we feel confident about the resilience of Asian markets. The region’s capital markets should continue to benefit from foreign inflows, supportive economic data and lower correlation with European and US markets. The correlation of high-yield bonds with equity markets has also been decreasing recently, a positive development for the portfolios in terms of diversification.

MARKETS CONTINUE TO WAIT FOR MORE US FISCAL SUPPORT

Portfolio Activity/ News

October was a slightly negative month for the portfolios, in large part due to weaker equity markets. The drawdown was limited, however, thanks to strong alpha generation and to the positive contribution from the Put spread. European equity funds were the worst detractors even if they fared better than their respective benchmarks. The largest positive portfolio contributions were provided by emerging, frontier and Chinese equity funds. European investment-grade bonds was another positive contributor as was the US dollar for non-USD portfolios.

Towards the end of the month, we trimmed some of the better performing positions to lock in profits and also cut some underwhelming funds to bring our equity allocation closer to neutral.

This extraordinary year has seen record levels of dispersion within the markets, whether between sectors, strategies, regions and individual stocks. For that reason, it has been most satisfying to observe that many of our active managers have added significant value through their stock picking and their allocations to the different sectors.

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Newsletter | October 2020

THE EUROZONE COMPOSITE PMI DROPS TO 50.4 IN SEPTEMBER DUE TO THE WEAKNESS OF SERVICES

- 20% THE FALL OF APPLE’S STOCK PRICE IN EARLY SEPTEMBER

Investment perspective

For the first time since the selloff observed in March, global equity markets produced a negative monthly return, with the MSCI World Index in local currencies dropping by 3% in September. US stocks underperformed as the momentum rally led by the technology mega-caps collapsed suddenly; this was reflected by the 5.2% monthly decline of the Nasdaq Composite. Demand for safe haven assets benefited the sovereign debt markets as well as the US dollar, whereas high yield bonds were negatively impacted by the widening of credit spreads. The stronger dollar contributed to extend the profit taking on gold prices, observed since the beginning of August, and also hurt the whole commodities’ asset class.

Year-to-date lagging stocks did not benefit from the profit-taking on the 2020 big winners as no real factor rotation was observed in the equity markets. The rise of the number of new Covid-19 cases, in Europe in particular, continued to weigh on the prices of already depressed stocks in some of the services’ sectors. Weaker-than-expected Eurozone PMI Services data confirmed that the economic recovery already appears to be stalling as more restrictions are being introduced across a number of European countries. In the US, the lack of any agreement on a new fiscal stimulus was a headwind for equity markets as was the rise of political tensions ahead of the upcoming US elections.

The final quarter of the year could prove to be particularly eventful and market volatility is likely to remain elevated. The outcomes of the US election and of the Brexit negotiations are just two of the issues that could have a meaningful bearing on markets on both sides of the Atlantic. A contested result of the US presidential election would be the worst result and would only add to the already high level of uncertainty. Other key ongoing issues include the timing of a new US fiscal stimulus as well as the approval of a widely accepted Covid-19 vaccine.

Investment strategy

The correction of equity markets observed in September does not appear to have fundamentally altered investors’ perspective on the markets. The equity asset class remains the obvious choice in the light of massive monetary support and hopes of additional fiscal stimulus. These factors should not however conceal the fact that the level of uncertainty on a number of issues remains elevated. This largely explains why we continue to hold some optionality in the portfolios to limit the potential damage of a more pronounced reversal of trends. The latest economic data, especially in Europe, are confirming that the recovery is not going to be smooth and that forecasts are prone to be subject to significant revisions. While having only a very limited impact on the markets at this stage, this could change were the economic outlook to deteriorate even more.

Our equity exposure is well diversified. We prefer to spread the risk across a number of regions and strategies rather than rely too much on one particular investment style or on one region. This approach served us well last month as our allocation to Japanese equities provided a significant positive contribution whereas most other equity positions ended the month with negative returns.

MARKETS ARE LIKELY TO BE VOLATILE IN THE WEEKS AHEAD

Portfolio Activity/ News

September was a slightly negative month for the portfolios due to weaker equity markets. A European value fund was the worst detractor followed by US Growth, US Small Caps and emerging market corporate debt. The trend-following strategy was also a detractor, in large part due to the rebound of the US dollar. The best contributions were provided by Japanese equities with stellar outperformances recorded by two funds. An Asian equity fund also brought a positive contribution as did the US dollar for portfolios referenced in other currencies. The fixed income exposure produced mixed results with high yield and emerging market debt underperforming.

During the past month, we decided to add to the exposure to Asian equities by investing into a China-focused fund. This was financed by trimming some fixed-income positions with limited upside. The Chinese equity market has proved to be resilient and generally less correlated to other equity markets. The lower impact of the coronavirus disease on the Chinese economy relatively to the rest of the world has been one of the drivers of the outperformance of Chinese equities. This factor combined with reasonable valuations should continue to be supportive.

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Newsletter | September 2020

THE FED HAS SHIFTED ITS POLICY TOWARDS AN AVERAGE INFLATION TARGETING REGIME

$2 TRILLION APPLE BECOMES THE FIRST US COMPANY TO REACH THIS MARKET CAP MILESTONE

Investment perspective

 Global equity markets performed strongly in August with the MSCI World Index in local currencies climbing by 6.1%. The US stock market had its best August since 1986 as the S&P 500 jumped by 7% and fully erased its losses from the coronavirus pandemic to hit new record highs. European stocks underperformed (+ 3.1% for the Euro Stoxx 50) and still remain below the levels observed in early June. Sovereign debt markets experienced a quite volatile month and the yields of long maturity bonds ended the month higher. The depreciation of the US dollar was extended throughout August and the euro ended the month with a 1.3% gain. 

Once again US equity markets were caracterized by the significant out-performance of the Nasdaq indexes and of the technology sector in particular; the Nasdaq Composite Index rose by 9.6% while the S&P Technology Sector Index climbed by 11.8%. Outstanding performances within the market were recorded by companies such as Tesla (+74%), Salesforce (+ 40%), Facebook (+ 16%) and by the biggest of them all, Apple (+ 21%). It was also revealing that the level of implied volatility of the US market, measured by the VIX Index, rose in tandem with equities during the second half of the month. Simultaneous increases in equity and volatility gauges are unusual and the move in the volatility measure may have been the result of investors chasing the rally. 

As widely expected, Federal Reserve Chair Jerome Powell announced a major shift in the way the central bank aims to achieve maximum employment and stable prices. During the virtual Jackson Hole Symposium, Powell said that the Fed would adopt a form of average inflation targeting regime, meaning that inflation will be allowed to go “moderately above” its 2% target after periods of persistently low pricing pressures. The Fed also signalled that employment can run stronger without setting off unwanted spikes in inflation. This means the Fed won’t be raising rates anytime soon and would not increase rates or brace for a rise in inflation even as employment levels strengthen. 

 

Investment strategy

The summer months have seen financial markets continuing to claw back their February and March losses. We did not change the structure of our portfolios but have added to our portfolio protection by covering the short September S&P Put option and by initiating a new January S&P Put spread. Our assessment of the current market conditions is torn between the logic of rising asset prices as a result of massive liquidity injections and our rising concerns about stretched valuations. This largely explains why we feel it is critical to hold some protection as a way of limiting the damage that a potential reversal of prevailing market trends would trigger.

We are getting closer to reducing our US dollar underweight for non-USD denominated portfolios. The Dollar Index has been depreciating since its peak observed in March and the move appears to be getting long in the tooth. The positioning of traders on the dollar is extremely short and thus reduces the likelihood of further immediate depreciation. For the EUR/USD parity our target for some dollar buying is around the 1.20 level.

WE HAVE EXTENDED OUR PUT SPREAD STRATEGY

Portfolio Activity/ News

August was a very strong month for the portfolios as only a small minority of underlying funds ended the month with modest negative returns. Within the equity asset class, US, Japanese and Frontier Market equities as well as European Small Caps produced the highest contributions. Significant contributions were also generated by a Long/Short equity strategy, European Value equities and by a thematic fund which was launched in the summer. Two fixed-income funds with longer duration and the trend-following strategy were small detractors, resulting largely from the rising yields of sovereign debt.

During the past month, we extended our Put spread strategy from a September expiry to a January one. We also approved a fund whose investment universe includes the world’s most valuable brands (global, upcoming and digital brands) as well as a Biotech fund. We have also purchased recently a thematic fund which invests into equities benefiting from secular growth opportunities, with a focus on the technology, healthcare and renewable energy sectors. The manager’s research and investment approach is original as it draws scientific, technological and industrial research together with financial analysis. Their process starts with the generation of ideas by scientists within their field of competence before financial analysts then conduct traditional financial research.

 

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Newsletter | June 2020

THE PRICE OF A BARREL OF BRENT OIL MORE THAN DOUBLED IN MAY

$10 TRILLION THE POTENTIAL PRICE TAG OF THE GLOBAL COVID-19 BAILOUT

Investment perspective

Global equity markets extended their rally in May and proved to be resilient to any negative news. Emerging markets underperformed as Chinese and Hong Kong stocks were negatively impacted by rising US-China tensions and Indian stocks were hit by COVID-19 concerns. Government debt markets were quite stable while HY and EM debt performed strongly during the second half of the month. In spite of this significant risk-on environment, the price of gold appreciated modestly, in part the result of a weaker US dollar. A proposal from Brussels for a €750 billion recovery fund, earmarked for the struggling economies of southern Europe, contributed to a strong end to the month for European assets, with the euro recording a 1.3% monthly gain against the US dollar. Finally, oil prices staged a spectacular rebound following a turbulent month of April; the price of a WTI barrel climbed by over 88% thanks to the combined effects of a recovery of demand and significant production cuts.

The acceleration of the re-opening of Western economies has been the main driver for risk assets; the markets’ belief that central banks are prepared to provide more support and that additional fiscal packages will be rolled out are other reasons behind the powerful ongoing rally. The markets have, at least so far, brushed aside the significant rise of tensions between China and the United States. The US has blamed China for the spreading of the COVID-19 coronavirus and also accused China of not respecting the terms of the 1997 Hong Kong handover agreement by imposing a new security law. Markets also appear to be currently ignoring all economic fundamentals, concerns over a second wave of the coronavirus, uncertainty over the timeline and availability of a vaccine, trade threats and near-term corporate profitability.

A lot has been written recently about the outperformance of the Growth style over Value this year, as well as over a much longer period, but there are some signs that Value could be starting to catch up a little. Sectors such as Energy, Financials, Industrials, Materials and Autos have been picking up steam and outperforming other sectors such as Consumer Staples and Healthcare which have been more resilient since the beginning of the year.

Investment strategy

We did not change the positioning of our portfolios in May and have kept in place the Put protection for around half of the equity allocation. The maturity and the strike of the Put option have been adjusted after we took some profit on the Put option initially bought in early-March. The result since this switch has been for the value of the portfolios to benefit from the higher appetite for risk assets and for the declining value of the Put option to represent a small opportunity cost. We feel very comfortable with the current positioning as we remain somewhat wary of the one-way direction of equity markets and of their increasingly demanding valuations.

The rally of equities has been accompanied by a rally of high yield and emerging market bonds since the middle of May; we had maintained our exposures to both asset classes after the market correction. The valuations of both asset classes are attractive in view of the high level of spreads and default expectations which are close to maximum levels observed on a historic basis.

EQUITY MARKETS APPEAR TO BE DEFYING THE LAWS OF GRAVITY

Portfolio Activity/ News

Portfolios continued to make up lost ground in May as nearly all the underlying positions ended the month with positive returns. Within the equity asset class, Japanese equities, US and European Small Caps as well as Growth stocks produced the highest contributions. Significant contributions were also generated by various fixed-income exposures with emerging markets' corporate bonds, global convertible bonds and high yield credit performing the best. Some alternative strategies which had posted strong performances during the correction of the markets ended the month with limited negative performances. We cut our exposure to the Risk Premia hedge fund strategy because of a combination of disappointing performance and of the strategy’s dwindling assets under management.

In a context of rallying equity markets and lower volatility, the biggest detractor for the portfolios was logically the Put position which serves as a protection for part of the equity allocation. During the month, we rolled over our position by selling the S&P 500 June 3’000 Put option in favour of a S&P 500 September 2’750 one.

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