Newsletter | March 2023
MARKETS WERE IMPACTED BY A REPRICING OF POLICY RATES IN FEBRUARY
4% THE EXPECTED PEAK LEVEL OF THE ECB’S KEY RATE
Investment perspective
The early-year optimism in financial markets gave way to renewed concerns over inflation and even tighter monetary policies, triggering a significant drop of bond markets. As often observed in 2022, the volatility in bond markets rose noticeably and impacted the momentum of other asset classes. The yields of 10-year Treasuries ended the month 41bps higher at 3.92% with those of Bunds with a similar maturity climbing by 37bps to 2.65%. While European equity markets proved to be resilient, as the Euro Stoxx 50 Index edged 1.8% higher, emerging market and US ones gave back a large portion of their January gains; the MSCI EM Index fell by 6.5% and the S&P 500 Index lost 2.6%. In this context, the US dollar benefited from the widening of the interest rate differential between Treasuries and Bunds, and from its safe haven status, to record a solid performance against other major currencies. A strong dollar and higher real interest rates meant that gold saw its early-year gains being erased, while other commodity prices also dropped.
Early-year market confidence over the decline of inflation appears to have been replaced by concerns that it will be more sticky and remain higher for longer than previously anticipated. This change of outlook was triggered by the publication of inflation data which was above forecasts, on both sides of the Atlantic, and was reflected by the steep rise of inflation expectations. The correction of bond markets in February means that they are more closely aligned now with the outlooks of the Federal Reserve and the ECB, with an implicit admission that policy rates will end up at much higher peak levels than previously expected. Markets are now pricing in peak policy rates of 5.5% in the US and 4% in the Eurozone, compared to January 2023 lows for peak rates of 4.7% and 3.05% respectively.
Investment strategy
We maintained our defensive asset allocation in February. Thanks to an underweight allocation towards equities and a low duration of the fixed income exposure, the drawdown of portfolios was not too deep. In last month’s newsletter, we had reiterated our scepticism about the markets’ optimistic outlook over a pivot by the Fed in the second half of 2023 and were therefore not surprised by the retreat of equity markets in view of rising bond yields. We believe that equity risk premiums are not attractive at this stage, leading us to remain cautious, especially in view of concerns over profit margins and the path of earnings.
We are closely observing the level of European bond yields as we are approaching a point where we would likely increase the duration of the portfolios. The latest developments in bond markets also mean that the recent appreciation of the US dollar has stalled. As we did not reach our first target on the EUR/USD parity, we have not yet reduced our dollar exposure for non-USD denominated portfolios.
INVESTORS HAVE BACKTRACKED FROM THEIR OPTIMISTIC STANCE OVER TERMINAL RATES
Portfolio Activity/ News
February was a negative month for the portfolios as both the equity and fixed income asset classes were detractors, while hedge funds produced only a marginal positive contribution. For non-USD denominated portfolios, the appreciation of the dollar provided a welcome positive contribution. Some of January’s best performing funds fared the worst during the month under review; the metal mining fund and Chinese equities were the largest equity detractors, whereas emerging market corporate bonds and the long duration investment-grade fund were the biggest fixed income ones. European Value and cyclical equities provided the best contributions within the equity asset class and the short duration European high yield fund generated the only positive fixed income contribution.
In February two new funds were approved by our investment committee. The first one runs a systematic Global Macro strategy based on fundamental and price-based indicators. The fund combines carry, fundamental, trend-following and value/reversion strategies, and displays a remarkable track-record over an extended number of years. The second fund is a concentrated US Value fund, which seeks to invest into great businesses trading at a “bargain”. Since its inception in 2008, the strategy has outperformed both its Value bench-mark and the broader S&P 500 Index.
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Newsletter | January 2023
MARKETS MAKE A STRONG START TO THE NEW YEAR
+ 10.7% THE JANUARY RISE OF THE NASDAQ COMPOSITE INDEX
Investment perspective
Financial markets got off to a very positive start in 2023 as investors took the view that the likelihood of a soft landing was rising despite the hawkish tone from the Federal Reserve and the European Central Bank. In this risk-on environment, the vast majority of equity markets posted above-average monthly gains, long-term bond yields decreased, credit spreads tightened, and the US dollar continued to depreciate. The MSCI World index in local currencies climbed by 6.4%, with the Euro Stoxx 50 index rising by 9.7% and the Hang Seng index by 10.4%. The yield on the 10-year Treasury note dropped by 36bps to 3.51%, with US and European high yield credit spreads contracting by 49bps and 68bps respectively. Other strong gains were also observed on industrial metals, as a result of the anticipation of renewed demand from China, and on the price of gold. Maybe a little surprisingly, oil prices ended the month lower, despite the boost from the reopening of China, while gas prices continued to slide at a fast pace.
At the time of writing, the Federal Reserve has just hiked its Fed fund rate by 0.25%, as fully anticipated. The more relevant outcome of the FOMC meeting were the comments by the Fed’s chair, Jerome Powell, on the future path of the Fed’s policy. Powell repeated that more rate increases were needed and that rate cuts in the second half of the year were unlikely. This goes against markets’ expectations for two rate cuts by the end of 2023. What was more surprising was that Powell did not push back more against the recent easing of financial conditions, leading markets to extend their early-year rally, with equities ending the trading session higher and bond yields declining. The ECB and the Bank of England also matched market expectations by hiking interest rates by 0.5%. The ECB signaled its intention to raise interest rates by another 0.5% in March and will then evaluate its policy depending on data. As was the case after the Fed’s decision, markets are continuing to rally, with bond yields dropping quite noticeably.
Investment strategy
At the onset of 2023, our asset allocation is composed of an underweight equity exposure, an allocation to fixed income which is close to neutral and an overweight exposure to hedge funds. Taking account of the strong performance of equities in January, we are sticking to this asset mix for the time being. We fear that markets could be overconfident in their dovish outlook relative to monetary policies and to the path of earnings. With bonds offering positive yields once again, we believe that it makes sense to hold more balanced portfolios and no longer to rely just on the equity asset class to generate portfolio performance. It is also reassuring that the current valuations of some of the traditional assets offer a better starting point for future portfolio returns than a year ago, when only a few of them could be considered cheap. Global value stocks, emerging and European equities, as well as investment grade credit are some of the assets that offer attractive valuations.
For non-USD denominated portfolios, our allocation to the US dollar remains underweight but we prefer to wait before reducing it further. From a medium to long-term perspective we would expect the dollar to depreciate but it continues to offer defensive qualities were markets to turn.
MARKETS INCREASINGLY POSITIONING FOR A SOFT LANDING SCENARIO
Portfolio Activity/ News
January was a strong month for the portfolios. With both bond and equity markets rising simultaneously, the majority of funds contributed to the performance, as to be expected. European Value equities, the metal mining fund, the global technology fund, Chinese equities, and the US Value fund provided the best contributions within the equity asset class. The only equity detractor was the healthcare fund, as the more defensive sectors such as healthcare, consumer staples and utilities ended the month lower. The best performers in the fixed income asset class were emerging market corporate bonds and the long duration investment-grade fund. In the alternative space, the Global Macro fund provided the best contribution, whereas one of the long/short equity funds, with a barely positive net exposure currently, ended the month with a small loss. The other hedge funds provided only marginal contributions.
Following a tough year for many strategies, we are confident that active managers will be able to generate more alpha in 2023. We would expect market dispersion to be high and to represent a favourable environment for good stock pickers. This extensive dispersion should also be helpful for hedge fund managers, and we are comfortable with our overweight exposure to these alternative strategies.
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Perspectivas de inversión 2023
Resumen de nuestras previsiones
2022 ha sido uno de los años más duros de la historia para los inversores
Este último año ha sido realmente brutal para los inversores. El endurecimiento de las políticas monetarias no sorprendió a nadie pero fue mucho más duro y dañino de lo que se esperaba en muchas clases de activos. El apresurado endurecimiento de las políticas monetarias ante la constante presión inflacionaria y la guerra en Ucrania fueron los mayores causantes del fuerte debilitamiento de los mercados. La política china «Covid Cero» también atizó otro golpe dado que su economía se comportó mucho peor de lo previsto. En un entorno de aversión al riesgo (risk-off) apenas quedaban sitios donde refugiarse y esto se reflejó en los penosos resultados de los bonos del Tesoro que se suelen considerar como activos más seguros. La volatilidad de los mercados de renta fija llegó a niveles críticos y siguió siendo muy alta durante la mayor parte del año. Esta tensión salpicó a otras clases de activos y el mayor grado de correlación entre renta variable y renta fija supuso que la diversificación no sirvió para proteger bien a los inversores de pérdidas en las carteras.
El vertiginoso ritmo del endurecimiento de la política monetaria de la Reserva Federal
2022 será recordado como el año en que la era de las políticas monetarias exageradamente acomodaticias llegó a su fin. Desde la Gran Recesión, los principales bancos centrales fueron bajando sus tipos de interés a cero o incluso a cifras negativas. Los inversores ya se esperaban la subida de los tipos de interés y la contracción de los balances de los bancos centrales en 2022, pero no estaban preparados para lo que ocurrió realmente. El cambio de la Reserva Federal de una política monetaria exageradamente complaciente a una muy restrictiva se produjo en tan solo unos meses, dado que crecieron rápidamente las subidas, del 0,25% en marzo al 0,75% en las siguientes cuatro reuniones del Comité Federal del Mercado Abierto (FOMC) celebradas entre junio y noviembre. El banco central estadounidense subió sus tipos de interes un 4,25% en 2022 para situarse entre el 4,25% y el 4,50% y aunque otros bancos centrales principales siguieron sus pasos, lo hicieron a un ritmo más pausado. Las últimas decisiones con respecto a los tipos de interés y los comunicados de los principales bancos centrales han confirmado su política restrictiva y su empeño en bajar la inflación.
Los inversores siguen centrados en las tendencias de la inflación y la geopolítica
Se espera un menor crecimiento del PIB en 2023 con un alto riesgo de que la economía mundial entre en recesión dado que las expectativas de crecimiento de los Estados Unidos y Europa son entre muy bajas y negativas. Gran parte dependerá del ritmo de deceleración de la inflación y de la trayectoria de las subidas de los tipos de interés. La tarea de los bancos centrales a través del mundo es extremadamente exigente y los riesgos de provocar daños por una política equivocada son mucho mayores de lo normal. Las perspectivas económicas podrían mejorar si China finalmente logra reabrir su economía con éxito. Las amenazas geopolíticas permanecen elevadas. Hay muchos focos de tensión en el mundo pero no se puede descartar la posibilidad de que se produzca algún acontecimiento positivo aunque no tengamos muchas esperanzas.
Ante el alto grado de incertidumbre seguimos siendo precavidos en la asignación de activos
El endurecimiento de las políticas monetarias ha eliminado ciertas distorsiones y excesos de los mercados observados en los últimos años, lo que implica que los ratios fundamentales deberían cobrar más relevancia ahora que ha terminado la era del dinero fácil. Las valoraciones han mejorado en la mayoría de las clases de activos, pero sigue persistiendo la incertidumbre en muchas cuestiones. Pese a la caída del año pasado, la renta variable sigue atravesando turbulencias. Esto justifica en gran medida por qué nos aferramos a nuestra sobre ponderación en estrategias alternativas y por qué hemos incrementado nuestra exposición a la renta fija hace poco dada la mejoría de su perfil rentabilidad/riesgo.
ÍNDICE
- RESUMEN DE NUESTRAS PREVISIONES
- 2022: REPASO DE NUESTROS TEMAS DE INVERSIÓN
- 2022: ACONTECIMIENTOS ECONÓMICOS Y POLÍTICO
- 2022: LOS MERCADOS FINANCIEROS
- 2023: PERSPECTIVAS ECONÓMICAS
- 2023: PERSPECTIVAS DE LOS MERCADOS FINANCIEROS
- 2023: ASIGNACIÓN DE ACTIVOS
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Newsletter | December 2022
THE DOLLAR INDEX HAD ITS WORST MONTH SINCE 2010
+ 26.6% THE REBOUND OF THE HANG SENG INDEX IN NOVEMBER
Investment perspective
November was a strong month for capital markets, as both equities and bonds performed well. For once, emerging markets’ equities outperformed those of developed ones; Chinese equities rallied massively due to a dramatic shift of investor sentiment in the wake of the end of October selloff. The MSCI EM index climbed by 14.6%, compared to a 5.5% gain for the MSCI World index in local currencies, whereas the Euro Stoxx 50 index gained 9.6%. These equity gains were accompanied by another negative month for the US dollar; the 5% monthly drop of the dollar index was effectively its worst since September 2010, and this move contributed significantly to the overall improved market sentiment. The decline of long-term bond yields was another supporting factor for risk assets; the yields of 10-year Treasuries and Bunds declined by 44bps and 21bps to 3.61% and 1.93%, respectively, resulting in increasingly inverted yield curves. Credit and emerging market debt spreads continued to contract at a fast pace. Significant moves were observed in the commodity space also, with the price of gold rising strongly whereas oil prices dropped by more than 6% on concerns about weaker demand.
As in October, one of the drivers for the stronger markets was the narrative that the Federal Reserve was likely to slow the pace of its interest rate hikes. The US central bank is widely expected to rise rates by 50bps at its December meeting following a string of 75bps increases. The fact that the latest inflation data in the US have been below expectations has contributed to the market’s optimism relative to the path of the Fed’s policy. The market could, however, be at risk of underestimating the terminal Fed fund rate in view of the very resilient job markets, and the fact that the Fed will want to avoid making a mistake by ending its hiking cycle prematurely.
Investment strategy
The recent rebound of equity markets has obviously been most welcome for the portfolios, but we are reluctant to add to our current equity allocation and we maintain our modest underweight positioning. In our opinion, markets could be overconfident that central banks will soon be ending their hiking cycle. The upcoming economic slowdown could also be accompanied by a declining growth of earnings, as margins contract from record highs, hence our caution.
On the other hand, we think that bond markets offer a more attractive risk/reward at present, and we will be increasing some of our exposures. Investment-grade credit, and funds having the flexibility to manage both duration and credit quality are our current top picks. These funds can allocate to some of the more attractive segments of the bond markets, in areas such as subordinated bonds of investment-grade companies, corporate credit and financials, and corporate hybrids.
MARKETS ARE AT RISK OF UNDERESTIMATING THE TERMINAL FED FUND RATE
Portfolio Activity/ News
November was a positive month for the portfolios thanks to the strong returns of equities and also of bond markets. The best contributions were provided by Chinese and emerging equities, metal mining companies, the European value fund, emerging market corporate bonds, the technology fund and long duration investment-grade bonds. For portfolios with an exposure into gold, it proved to be a rewarding month as the precious metal climbed by 8.3%, as it benefited from lower real bond yields and the weaker dollar. The number of detractors was low. The depreciation of the dollar hurt portfolios not denominated in USD, as did the drop of the trend following CTA strategy, US small caps and the multi-thematic fund.
We were pleased to observe the massive rebound of our Chinese equity fund in November. In last month’s newsletter, we had highlighted why we believed it still made sense to be exposed to Chinese equities, and the recent upside move just shows how difficult it can be to predict trends. It also shows how sentiment is continuing to drive the markets, with the shift in China’s Covid stance towards a loosening of some restrictions contributing to boost market sentiment.
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Newsletter | November 2022
DEVELOPED MARKETS’ EQUITIES REBOUND BUT INVESTORS DUMP CHINESE EQUITIES
+ 7.1% THE PERFORMANCE OF THE MSCI WORLD IN OCTOBER
Investment perspective
Following a dreadful September, the month of October provided much welcome relief for investors thanks to a rebound of developed markets’ equities. One of the main drivers for this rally was the perception that key central banks might be getting closer to slowing the pace of their rate hikes following the decisions by the Bank of Canada and the Reserve Bank of Australia to raise interest rates by less than expected. The rise of equities was accompanied by a pause of the US dollar rally, tighter credit spreads, and an upwards move of the US yield curve. A significant underperformance of emerging market equities was also observed, as they recorded a monthly drop, largely as a result of Chinese equities plunging further from already depressed levels. In terms of investment style, Value outperformed Growth, and energy was the best performing sector, supported by rising oil prices. October also provided a much needed return to calm for UK assets after the replacement of Liz Truss, who became the shortest serving UK prime minister, by the former chancellor Rishi Sunak. The UK yield curve shifted down materially, with 2-year and 10-year Gilt yields dropping by 95bps and 58bps, respectively, whereas the pound recovered some of its recent losses.
With more than 80% of the S&P 500’s market cap having reported, earnings have beaten estimates by 3.6%, with 66% of companies topping projections. Earnings per share growth is on pace for 5.9%, assuming the current beat rate for the rest of the season. Even if the beat rate was inferior to those of the previous quarters, amid lowered earnings’ expectations, companies’ results proved to be supportive for equity markets overall. What was quite striking was that equity markets continued to rise even if the share prices of some of the US mega-caps, including Amazon, Alphabet, Microsoft and Meta, were badly hit by a set of disappointing reportings.
Investment strategy
At the time of writing this newsletter, the Federal Reserve has just announced another 75bps rate hike, as expected by the markets. What was less anticipated was the tone of Jay Powell’s press conference; equity markets had been rallying on the assumption that the Fed could be approaching the end of its hiking cycle and could even cut rates next year. Fed chair Powell made it clear that the US central bank still had work to do, and that real interest rates had to turn positive, implying that markets’ expectations were too optimistic in relation to future Fed fund rates. We were not in the camp expecting the Fed to turn more dovish, and this explains why we had not increased our equity exposure. In reason of the deterioration of the global economy, restrictive monetary policies, and a risk of further earnings’ downgrades, we have maintained our equity underweight.
It has been a disappointing month for Chinese equities, but we continue to believe that an exposure to the country still makes sense despite the ongoing headwinds. Overly cheap valuations, a significantly underweight positioning by foreign investors, and the prospect of some policy support are just some of the main reasons why we remain invested.
MARKETS HAD PINNED THEIR HOPES ON MORE DOVISH CENTRAL BANKS ONCE AGAIN
Portfolio Activity/ News
October was a positive month for the portfolios thanks to the rebound of developed markets’ equities. US and European Value funds, metal mining equities, the Healthcare fund, and US small caps provided the best contributions. The positive return of portfolios was, however, dented severely by the exposure to Chinese equities, and to those of emerging and frontier markets. The overall contribution of fixed-income was negative due to the declines of emerging market debt and the long duration investment-grade fund, even if convertible bonds did provide some positive returns. The overall contribution of the alternative exposure was neutral, with the recently added L/S US small cap fund continuing to perform well. For portfolios not denominated in USD, the depreciation of the US dollar was a detractor.
In October, we added a high yield bond fund to our list of approved funds. The particularity of this fund is that it is managed based on a fixed maturity approach, with the fund ending at the end of 2026. This means that all the underlying bonds will have maturities with a maximum of six months longer than the end of 2026.This approach is more defensive than a traditional bond fund, as risk factors such as credit risk, duration and volatility, decrease over time. We believe that the next months could provide a good entry point for the strategy, if credit spreads were to widen more.
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