BY PAOLO MARONGIU
March was a very good month for the European equity market both in absolute and relative terms. On an absolute basis during the month, the MSCI Europe Index rose +3.0% having risen strongly on four days (the first and last three days of the month), whilst in the middle of March the market traded sideways.
On a relative basis European equities performed well in comparison to US and global equities; the S&P500 was flat (-0.04%) and the MSCI World Index rose slightly (+0.82%). The main contribution to the good European performance came from the Eurozone markets, as the Italian and Spanish markets generated huge returns in the month.
The market appeared to ignore the risk attached to the French political situation, the outcome of the Dutch elections reassured investors and the perception of an unlikely victory of the anti-euro FN party led investors to take on more risk in their portfolios. The volatility of the Eurostoxx 50 was unchanged, albeit with a huge decline at the middle of the month after the Dutch elections and a subsequent pickup in the second half.
Bond markets were flat in the United States, while the German Bund future slid -0.85%. The political risk premium attached to the Bund declined and this allowed the 10 year yield to reach 0.33% at the end of the month, from a low starting point of 0.21% at the end of February, when political risk was perceived higher.
Seasonality remains very favorable for equities, March is often a difficult month for equity markets while April is one of the best months for equities. There is still a high level of complacency among the global investment community, but the difficult market dynamics observed in March led to a removal of some excessive positive sentiment among retail investors, while professional investors took advantage of the situation to raise their exposure, on average.
In the second half of March the Fund held a stable, mid – high net long equity exposure, pursuing its target of a stable return with low volatility, which is a precondition to achieving absolute returns in the vast majority of market scenarios.
The risk premium attached to global equity markets is still debatable, since we are in the late phase of the cycle. Too much complacency among investors may lead the Investment Adviser towards a cautious approach from time to time, especially after the main global equity markets have made major gains over a very short time frame, especially year to date.
The Fund invests in European markets, so there is an opportunity to catch a huge amount of relative value until the latter part of the year. There is no sign of sector rotation so far, but as soon as the US yield curve starts to steepen again, the Investment Adviser will look to adjust a portion of the portfolio’s style by switching from growth and quality to value themes.
The views and statements contained herein are those of Sofia SGR in their capacity as Investment Adviser to the Fund as of 19/04/2017 and are based on internal research and modelling.