Newsletter | June 2023




Investment perspective

In May most equity markets were rangebound as investors’ attention was gripped by the debt ceiling talks in Washington to avoid a default by the US government. Japanese equities continued to perform well, however, as did US growth stocks, in particular those of companies heavily involved in Artificial Intelligence. European and emerging market equities struggled and ended the month with small losses. While European bond yields were mostly stable, the Treasury yield curve shifted much higher as investors reduced some of their exposure to US debt in view of the risk of a first-ever US default; 2-year and 10-year Treasury yields rose by 40bps and 22bps, from 4.01% and 3.43% to 4.41% and 3.65% respectively. In this context, the US dollar performed well as it recouped its year-to-date losses against the euro, with a 3% return in May. Weakness was observed in commodity prices on concerns over softer global demand; the prices of industrial metals, such as copper and iron ore, fared poorly, as did oil prices, with a barrel of WTI oil dropping by more than 11%.

Market expectations relative to the path of the Federal Reserve’s monetary policy have shifted quite significantly during the last weeks. While there is a broad consensus that the prospect of further interest rate hikes appears to be very limited from now on, markets repriced their expectations in May for the end-2023 level of Fed funds. From a point where three rate cuts by the end of the year were anticipated, markets are now pricing in one rate cut only. This is more closely aligned with the Federal Reserve’s outlook as it has consistently pushed back against the idea of rate cuts this year already.

As often observed in the past, Democrats and Republicans finally reached an eleventh hour deal to avert the first-ever default on US government debt. The legislation that suspends the $31.4 trillion debt ceiling will remain in effect until 2025, when one is likely to face a similar situation once again.


Investment strategy

At the onset of summer, we are sticking to our defensive portfolio asset allocation. We remain cautious in view of a slowdown of economic activity, higher for longer interest rates, tighter bank lending standards, and the risk of rising bond yields. Following the US debt ceiling deal, a deluge of Treasury bill issuance is coming; this could drain liquidity from the markets and push bond yields higher which could in turn also impact stock prices negatively. The narrow rally of the US stock markets is also of concern based on past obser-vations. That is why we are also maintaining our diversified allocation. We are seeing some early signs that a rotation might be taking place in the markets. Strategies which have underperformed up to now appear to finally be attracting some attention from investors. It is too early to tell whether these are sustainable trends, but we see good fundamental reasons to remain invested in this way.



Portfolio Activity/ News

May was another flattish month for the portfolios as positive and negative monthly returns for the various underlying positions cancelled each other out. The best contributions were provided by the global technology fund, the multi-thematic fund, global convertible bonds, the systematic global macro strategy, and by frontier markets’ equities. For non-USD denominated portfolios, the strong appreciation of the dollar also contributed to the performance. Alternative strategies overall also added to the performance of the portfolios The main detractors over the past month were European value and Chinese equities, emerging market corporate debt as well as the specialty metals fund. As often highlighted, the performances of some indices this year are quite deceiving as they have been driven by a small number of stocks and sectors. The dispersion of performance between the value and growth styles, between small and large caps, between the different sectors, as well as between different regions is striking. As an illustration the spread of performances between our best and worst performing equity funds was over 40% as at the end of May!

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