European market shows strong come back summer drawdown


Fund Commentary
23 Oct 2017


After a short-lived decline at the beginning of September leading the MSCI Europe Index to reach its monthly low of 126.12 points, the European stock market rebounded strongly. Starting from its monthly low, two corrections took place, culminating in a monthly high and closing price of 131.01. This gain indicated a strong come back from the negative market trend observed throughout the summer.

The European equity market is positive year to date: at the end of September, the MSCI Europe Index showed a good price return (+6.95%), narrowing the gap to the yearly high posted in May (around 134). Overall, the Investment Adviser thinks that the market has almost entirely recovered from the drawdown in the summer, showing both strength and resilience.

In September, the American stock market posted a new historical high (in local currency terms). It is however still far from its high posted in March (in Euro terms), leaving a relatively wide gap between this year’s high and September’s closing price.

Throughout the month, the Dollar rebounded, loosening the pressure on the Euro and thus paving the way for a European equity recovery in line with the global market. The Euro lost some ground and fell from around 1.19 to 1.17, while the Dollar Index rebounded from its monthly low of 91 to 93.

The substantial loss posted by the European market in the summertime (following the Dollar depreciation) made equity valuations appealing from a tactical point of view. This lead the Investment Adviser to slightly increase the portfolio’s net long exposure during the first part of the month, in order to capture some relative value. In last month’s commentary, it was noted that some relative value could emerge in Europe if the Euro was able to hold its 1.20 level and temporarily quit its uptrend, which indeed proved to materialise throughout the month.

In September, the Strategic Beta Flex Fund returned 1%. There was no intra-month drawdown and even during the sideways movement throughout the first part of the month the strategy remained stable. The Fund’s volatility is still under control, since equity valuations are near their historical highs, both in absolute and in cyclical adjusted terms.

The team’s cautious approach lead to a partial hedging of the portfolio’s long exposure in the second half of the month, following the short term overshooting of the market. At the moment, one can observe a premium between the reference equity market and its long term moving average. This gap is not yet excessive from a statistical point of view, but after the steep September rally the team deemed it safer to protect its assets and employ a balanced and cautious approach to the riskier assets, until the equity markets create a new trend.

From a statistical point of view, both August and September are bad months for equity markets: this year’s August seasonality was as expected, while September was characterized by a reversal of the usual seasonality. In October, equity volatility typically tends to surge, thus paving the way to interesting buy opportunities, which often give excellent returns around year end. If the market trades above its long term moving average, the volatility spike is usually not as pronounced, so that a new sideways movement and subsequently a new acceleration may emerge.

The views and statements contained herein are those of Sofia SGR in their capacity as Investment Adviser to the Fund as of 16/10/2017 and are based on internal research and modelling.