Market Development: In May, the MSCI World Index (net returns in USD) rose by 1.44%, the Eurostoxx 50 (net returns in EUR) returned +2.30% whilst the S&P 500 also increased by 0.55%.
The Dollar Index (DXY Index) fell by 1.59% over the period whilst the generic 30Yr Treasury yield decreased slightly, from 2.30% to 2.28% and the VIX fluctuated – nearly reaching 28 before closing the month back down around 17.
The earnings season, backed by constructive economic data releases, has continued to support equity markets at large, despite their elevated valuations, from a historical point of view and the prospect of corporate margin contractions. Indeed, the environment for aggregate corporate margins, or in other words the corporate profit share of GDP, has been extremely favourable for support and expansion over recent years.
That said, it seems increasingly likely that this trend will not continue forever as the wealth gap, social tensions and input price inflation increase. Therefore, in our opinion, it is a necessity that policymakers begin to favour labour market dynamics / participants ahead of big corporations and their shareholders.
In turn, this should manifest itself in the form of an impact on corporate margins which could leave market participants in a peculiar situation. A landscape where:
1. There are very few, if any, investment alternatives to equities;
2. Inflation: how it evolves and how central banks will manage it; remains a big question;
3. and relatively elevated valuations.
All of this seems to impact the outlook for equities. That said, there are other dynamics that support holding equities. First of all current yield levels, valuations are not that high when accounting for these; further, the overall household allocation to equities is high but there is still room to grow. Finally given that central banks have a clear agenda which underlines a base case for inflation to rise but real rates remain low, combined, these factors should be supportive for equities.
Generally speaking, this should lead investors toward real assets (which equities are arguable, as revenues are linked to inflation) and more specifically toward “clean” earnings growth, which tends to be positive in real terms. Selecting the right companies, with pricing power and resilient business models, will be key.
In our view, the current cycle remains on an ascending phase globally, supported by accommodative fiscal policies and fluid financial conditions across the globe, while interest rates continue to be sharply negative in real terms across developed markets. These conditions remain favourable for equities generally, especially as they benefit from positive valuation differentials compared to other asset classes.
Although the US market continues to set the tone, regional disparities are emerging more clearly. As the US progresses, so will the likelihood of a transition to mid-cycle positioning, i.e. more balanced between styles.
We remain cognizant of the potential for aggregate corporate margin peaks and believe company selection will be key. Nonetheless, being very selective on the quality of growth whilst maintaining a comfortable level of firepower on the sidelines is as relevant as ever in our opinion.
In terms of contribution, Centene (+0.30%), Asahi Group (+0.13%) and HCA Healthcare (+0.10%) were the largest positive contributors, whilst Dollar Tree (-0.22%), Global Payments (-0.17%) and Alibaba (-0.08%) were the largest detractors.
As always, we invite investors, or prospective investors in the Sturdza Family Fund to discuss the opportunities with the investment team if they would like to understand our views on the current situation and the positions held in the portfolio. Please do not hesitate to contact Adam or visit the Sturdza Family Fund Page >
+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 16/06/2021 and are based on internal research and modelling. Please click on Disclaimer Page to view full disclaimers.