Old habits die hard

Market Development: In January, the MSCI World Index (total returns in USD) gained 7.08%, the EURO STOXX 50 (net returns in EUR) returned 5.6%, whilst the S&P 500 (total return) also ended the month in the green, up by 6.28%. The Dollar Index (DXY Index) lost 1.38%, whilst the generic 30Yr Treasury yield decreased from 3.97% to 3.64% and the VIX came down from 21.7 to 19.4.

Commentaire du Fonds
7 Fév 2023

Market Development: In January, the MSCI World Index (total returns in USD) gained 7.08%, the EURO STOXX 50 (net returns in EUR) returned 5.6%, whilst the S&P 500 (total return) also ended the month in the green, up by 6.28%. The Dollar Index (DXY Index) lost 1.38%, whilst the generic 30Yr Treasury yield decreased from 3.97% to 3.64% and the VIX came down from 21.7 to 19.4.

The market decided to take the new year in stride, with rocketing asset prices across the board, seemingly supported by more risk appetite as shown by tightening credit spreads and a higher conviction in inflation’s downward trajectory; as evidenced by falling mid to long-term interest rates.

In the US, growth stocks fared particularly well with an especially remarkable performance from the highest growth segment of the market: the ARK Innovation ETF gained north of 27% in this short time frame, in a sharp reversal of the 2022 dynamics.

Europe was a relative outperformer, supported by decreasing energy prices and reassuring economic data; comforting the investment community hoping for a soft landing. This enabled the European index to have one of its strongest Januarys in history, rendered even more attractive to international investors given a rebounding Euro currency and thus contributing to the first positive month of net flows into Europe in almost a year.

Overall macro sentiment has improved, with Q4 GDP numbers coming in above expectations in both Europe and the US, inciting investors to believe in a soft landing scenario, ideal for equity valuations. Nonetheless, in the US, current earnings reports are coming in slightly weaker than typical, while Europe is marginally outperforming on a smaller sample size compared to expectations. The priority remains cost control in most large corporates, with an additional wave of layoffs announced, particularly in the Tech sector.

China’s reopening is not yet visible in the numbers with weak economic indicators, yet expectations have rebounded significantly given what some believe could become a major consumption spree after almost three years of significant restraint.

The stark yield curve inversion; the rapid ascent of financial assets; as well as compressing credit spreads are testimony of a market much more inclined to disagree with the Central Banks’ ongoing cautious and hawkish messages, increasingly pricing in an ideal scenario of normalising inflation, mild recession and hence upcoming “pivot” towards dovishness from the Fed and ECB.

Market Outlook

Last month we mentioned that our strategy was well positioned for attractive prospective returns following a stark derating of financial assets in 2022, especially when considering a relatively more conducive macro backdrop.

Certainly, January demonstrated that investors agreed on the opportunity, yet this significant rally does leave us surprised, both given its force and underlying mix: it seems to us that the market has become almost defiant of Central Banks, as the stark gap between the Fed’s dot plot and the forward curves demonstrate.

The current market behaviour suggests a belief that the world is getting back to the 2013-2019 period of persistent low growth, low inflation and monetary accommodation, sparking the old reflexes of buying long-dated growth at high multiples.

The ongoing caution from active fund managers which, contrary to retail and trend-following strategies, have lagged this January bounce, is more evidence of an ambiguous market where the glass appears intensely half full to some and half empty to others, as coincident, trustworthy macroeconomic data is hard to come by while lagging indicators currently feel “just right”.

Our current allocation is slightly more constructive, although our focus remains more on the bottom-up work of, when possible, upgrading the quality and the secular, reasonably priced growth profile of our investments, in order to prepare for multiple scenarios and ensure our ability to compound on the long-term.

Portfolio Development

The Sturdza Family Fund‘s NAV gained 4.21% during the month, reflective of the above-mentioned upward move in risk assets.

In terms of equity contribution, Worldline led the way (+25bps), followed by Air Liquide (+22bps), Teleperformance (+22bps), Amazon (+22bps) and Meta (+21bps). On the detractors’ side, the bottom performers were Centene (-15bps), UnitedHealth (-9bps), Dollar General (-3bps), O’Reilly (-2bps) and Union Pacific (-2bps).

As mentioned above, European assets were significantly rewarded in January, supporting a rebound in both the higher beta stocks held in the portfolio (Worldline up 15.8%), and the more defensive, quality companies (Air Liquide up 12.3%) that benefited from a milder economic and interest rate outlook.

Teleperformance continued its ascent (+16.6%) following the previously discussed November correction, in-line with our belief that the drawdown was disproportionate. Other recent entrants such as Amadeus outperformed our expectations, while the few negative contributors were generally affected by industry-specific headwinds (e.g. US managed care) and likely market rotations away from “steady” businesses in favour of more growth and risk.

On the fixed-income side, while our duration has remained low and thus did not fully benefit from the stark interest rate compression, the hybrid corporate positions initiated in October continued to perform well, as credit spreads compressed and issuers continue to demonstrate discipline and investor friendliness in managing their funding stack.

After an only marginally positive 2022 on the put writing strategy, the rally in equities, combined with reduced implied volatility, allowed the Fund to harvest welcome premiums from out-of-the-money puts expiring worthless or trading at very low prices.

Finally, during the month we made changes to the portfolio in line with our constant quest to upgrade the quality and focus on strong franchises offering growth, reasonable valuations and limited economic exposure.

We divested our remaining positions in Dollar General and Salesforce.com; and initiated positions in GE Healthcare, Pernod Ricard and Lonza, three companies that are leaders in their respective fields; have a demonstrated track record of successful growth and vision; and which all trade at relatively attractive valuations given their potential future growth profiles.

As always, we invite investors and prospective investors, to contact us should they wish to understand our views on the current situation and the positions held in the portfolio. Please do not hesitate to contact us for further information.

Adam TurbervilleAdam Turberville
+44 1481 742380

The views and statements contained herein are those of Banque Eric Sturdza SA in their capacity as Investment Advisers to the Fund as of 03/02/2023 and are based on internal research and modelling. Please click on Disclaimer Page to view full disclaimers.