Central banks in a corner amid cyclical pressures from China

Market Development: In April, the MSCI World Index (total returns in USD) dropped 8.3%, the EURO STOXX 50 (net returns in EUR) defied the move with a 0.8% gain, whilst the S&P 500 (total return) led the drawdown with a -8.7% return. The Dollar Index (DXY Index) gained 4.7% over the period, whilst the generic 30Yr Treasury yield increased from 2.45% to 3.00% and the VIX shot up to 31.66.

Fund Commentary
16 May 2022

Market Development: In April, the MSCI World Index (total returns in USD) dropped 8.3%, the EURO STOXX 50 (net returns in EUR) defied the move with a 0.8% gain, whilst the S&P 500 (total return) led the drawdown with a -8.7% return. The Dollar Index (DXY Index) gained 4.7% over the period, whilst the generic 30Yr Treasury yield increased from 2.45% to 3.00% and the VIX shot up to 31.66.

April saw another leg-down materialise in most liquid asset classes, pushing the US and world equity indices back towards their year-to-date lows. Amid more macroeconomic fears from China’s COVID lockdowns and the lack of progress in the Ukraine-Russia conflict, a clear risk-off mood materialised in the market, evidenced by a rebound in credit spreads mid-month.

With disappointing earnings in some large cap technologies weighing heavily on the Index (esp. Amazon and Netflix), the Nasdaq had its worst monthly performance since October 2008, adding profit pressures to a group already under pressure from valuation levels.

Between the strict zero COVID policies in effect throughout China, and the escalating verbal exchanges on the Ukraine front, the potential for both global growth deceleration and further supply chain disruptions contributed to a challenging environment for investors and central banks.

While the overall macro indicators remain rather positive, Chinese consumption and investment momentum is starting to show signs of pressure, and robust US numbers were taken with a pinch of salt, given their built-in lag.

With little sign of inflation peaking, expectations for further monetary tightening continue to get priced in by the market as evidenced by the drastic move in the US yield curve – the 10Yr Treasury gaining more than 0.5% in the month and the Bund now close to 1%.

Lost in the drawdown was at least a rather positive aggregate earnings season, with the large majority of US companies having now published earnings with generally satisfactory results – however, supply chains and the cyclical backdrop were key sources of discussion in management calls.

Market Outlook

Looking forward, visibility remains limited as markets remain focused on the inflation picture and the response of central banks, while cyclical pressures add to worries of a possible global recession down the line. In addition, escalating rhetoric surrounding the Ukraine / Russia situation continues to fuel risk aversion.

The US economy remains on an upward trajectory for now, with strong employment numbers and activity readings, yet inflation will pressure this momentum in the coming year.

The Sturdza Family Fund’s conservative positioning remains, with high quality and low duration on the fixed-income side and relatively low equity exposure, a profile deemed appropriate for the current market. As experienced during the month, volatile markets will likely create opportunities for reinvestment in quality companies in the future.

Portfolio Development

The Fund’s NAV declined 4.60% during the month, reflective of the risk-off move impacting global equities. In terms of contribution, our protective puts on the Russell 2000 were the largest single contributor (+0.27%), followed by defensive names such as Constellation Brands (+0.1%), Iberdrola (+0.05%) and Dollar Tree (0.02%). On the detractor side, Alphabet led the way (-0.29%), followed by Amazon (-0.22%) and Comcast (-0.18%).

The Fund did not implement any significant moves during the month but welcomed the confirmation of a takeover of our small “special situation” position Albioma by KKR, a position initiated immediately after the first rumours were leaked to the public in early March.

Overall, with the earnings season in full swing during the month, companies in our portfolio generally communicated positive results and guidance, even as market-wide moves pressured equity prices.

The reigning uncertainty and pressures on financial assets, emanating from both inflation and cyclical pressures, remain negative forces, sparking de-ratings across the board. The Fund retains a conservative profile to enable us to seize opportunities as they materialise.

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
Director
+44 1481 742380
a.turberville@ericsturdza.com


The views and statements contained herein are those of Banque Eric Sturdza SA in their capacity as Investment Advisers to the Fund as of 12/05/2022 and are based on internal research and modelling. Please click on Disclaimer Page to view full disclaimers.