BY PAOLO MARONGIU
Market volatility spiked abruptly between the end of January and the first half of February, leading equity markets to fall and the positive mood, which had characterised the beginning of the year, to quickly be replaced by a widespread sense of fear.
The MSCI Europe Index lost -3.87% during the month, with a move in the risk free rate and the fear that inflation could spike sharply as the main drivers behind the correction, changing the market structure fundamentally.
In February, volatility was the main focus, with short volatility structures suffering, contributing largely to the overall market correction. All of the investment styles performed in line with the MSCI Europe Index, apart from the MSCI Europe Quality Index, which lost -0.44% on a relative basis.
During the month, the European market recovered 4.1% from its low. At the same time the Euro still proved to be relatively strong, fluctuating between 1.21-1.25 against the USD.
Global equity markets declined to a relative low near (but still above) their long term moving average in February. This said, the scenario was quite different in Europe, where the market proved to be comparatively weaker, lowering its long term reference points. All in all, the American stock market was stronger than the European market once again, both during the corrective phase as well as during the subsequent recovery.
Overall, global growth remains solid, with the economy appearing to be in the “late” rather than the “end cycle” stage. Corrections can still be seized upon as buying opportunities, when equity markets reach important long term floors, as has been the case with the long term moving average for both, the MSCI World Index and S&P 500 Index in February.
The Investment Adviser initially expected 2018 to be more volatile than 2017, given a generally cautious stance on equity valuations and stretched global PMIs, substantially dampening optimism. This view proved to be correct in January, with the team expecting another volatility spike later in the year, potentially in the second part of spring.
During the month, the Fund lost -0.47%. Nevertheless, the long side of the portfolio was able to deliver alpha with a diversified structure in terms of style. The team’s stance will once again turn cautious if the market starts to react quickly in the short term and starts testing the highs posted in January. The equity risk premium remains a key driver of the Investment Adviser’s strategy, with the main theme in 2018 being global liquidity in financial markets. Until liquidity is ample and widespread, investors can still be constructive. According to the team, equity valuations will have to incorporate the Central Banks’ new policies during the coming months, as the ECB will quit its quantitative easing and the Federal Reserve will proceed with its rate hikes. In the Investment Adviser’s opinion, these will be the main drivers lowering global liquidity and affecting equity markets.
The views and statements contained herein are those of Sofia SGR in their capacity as Investment Adviser to the Fund as of 16/03/18 and are based on internal research and modelling.