An extraordinary 2019 with 2020 Outlook clouded, perhaps volatile in the 2nd half

The Strategic Europe Quality Fund returned -0.09% in December underperforming its index by 2.15%, giving 2019 calendar year performance of 27.57%, outperforming the benchmark by 1.52%. The largest detractor to alpha in December was the healthcare sector primarily due to Qiagen’s share price sell-off at the end of the month following the company announcement that a strategic review had ended with a decision not to break up or sell the business.

Monthly Fund Commentary
17 Jan 2020

The Strategic Europe Quality Fund returned -0.09% in December underperforming its index by 2.15%, giving 2019 calendar year performance of 27.57%, outperforming the benchmark by 1.52%. The largest detractor to alpha in December was the healthcare sector primarily due to Qiagen’s share price sell-off at the end of the month following the company announcement that a strategic review had ended with a decision not to break up or sell the business.

The consumer staples sector was also a detractor over the month. The best performing sectors for the index over the month were utilities, financials and materials; while communication services, consumer staples and industrials were the worst performing sectors.

At a single stock level the best performing stock for the European Fund was SBM Offshore, and as mentioned above, the main detractor was Qiagen.

The Strategic Global Quality Fund returned 1.28% in December underperforming its index by 1.72%, giving 2019 calendar year performance of 23.59%, underperforming the benchmark by 4.08%. The largest detractors to alpha in December were the materials sector, due to stock selection, and the information technology sector, also due to stock selection.

The best performing sectors for the index over the month were energy, information technology and materials; while industrials, real estate, and communication services were the worst performing sectors.

At a single stock level the best performing stock for the Fund was Kao Corporation, while the worst performing stock was IFF.

Market Outlook

2019 was somewhat extraordinary as more or less all asset classes climbed with good returns. The outlook for the world equity markets in 2020 is rather more clouded in the Investment Adviser’s view. There is little concern for valuations, top line is all that matters and true earnings seem irrelevant. Corporate gearing is at an all-time high while monetary conditions are loose. There is a complete disconnect between the stock market and the economy.

Looking forward, it is clear that the United States and United Kingdom have understood that the fiscal side of the equation needs to be engaged more, leading to a fusion of monetary and fiscal policy. The labour share of profits needs to be improved in order not to have revolutions in the street – this trend has started but it has much further to go in the Investment Adviser’s opinion.

This combined with the fact that the world economic system is fragmenting around the Americas and China blocks means that profitability margins will come under pressure given there is little pricing power especially in things which are not consumer related.

The strategic positioning of Europe is unclear given that Brexit is now a reality. The US presidential election will need following closely, in the event that the Democrats win we are likely to see increased volatility. The Investment Adviser suspects that 2020 will see much more volatility than we have seen in recent years, particularly in the second half.

The views and statements contained herein are those of Lofoten Asset Management in their capacity as Investment Adviser to the funds as of 15/01/2020 and are based on internal research and modelling.