Market Development: In January, the MSCI World Index (total returns in USD) fell 5.3%, the EURO STOXX 50 (net returns in EUR) dipped by 2.9%, whilst the S&P 500 (total return) also gave back 5.3%. The Dollar Index (DXY Index) gained 0.9% over the period, whilst the generic 30Yr Treasury yield increased from 1.9% to 2.1% and the VIX moved up from 17.22 to 24.83.
January proved to be a volatile and treacherous month, in stark contrast to the typical “January Effect”, the well-known market anomaly resulting in above-average returns during the first month of the year. Indeed, equity markets are down significantly since 31st December 2021 as investors’ expectations quickly evolved from benign policy adjustment to a heavy-handed hiking cycle by the Federal Reserve.
What started as a contained adjustment of equity prices to a rising yield curve (1.51% to 1.88% on the 10Y yield around mid-month), eventually evolved into a broader risk-off correction confirmed by typical safe-haven flows, including a small initial reversal in yields. Unsurprisingly, the correction was particularly difficult for the highly valued growth stocks, and outright vicious for some of the so-called “concept stocks”.
In a twist for the crypto enthusiasts, expectations of receding liquidity and higher rates impacted crypto assets with force, while gold held surprisingly well. With the S&P 500 experiencing significant price volatility, including an impressive -3.9% and +4.4% intraday move on 24th January, the price discovery for this post-COVID, higher baseline inflation world is taking place in a rather dramatic fashion so far.
Against this backdrop, Chairman Powell’s press conference on 26th January was more akin to a cold shoulder than a comforting embrace. Underscoring a tight labour market, strong economic momentum and ongoing inflation, the Chairman seemingly went out of his way to differentiate the current rate cycle from the previous one, opening up the door to “proceeding sooner, and perhaps faster”, while also distancing himself from the gyrations of the market by reiterating a focus on “the real economy” and the anticipatory nature of financial conditions which he hinted as being “adequate”.
For reference, in 2018, a hawkish Jerome Powell was forced into submission by collapsing asset markets and decreasing economic momentum, setting up a policy reversal, accompanied by a strong 2019 equity rally. Of course, his willingness to decisively intervene in March 2020 further burnished his credentials among equity bulls.
Now, however, his December hawkish pivot coupled with additional conviction this month is pushing investors to question the “Fed Put”, and underscores the focus placed on responding to current inflation readings. As of now, the market remains in flux, looking to understand at what valuation it will all be “priced-in”.
Looking forward constructively, it seems to us that if the Fed plans to differentiate the current and past rate cycles, equity investors, including us, should consider doing the same. Indeed, strong GDP growth remains an engine of revenue growth potential not seen in years, which should help fight off some of the cost pressures impacting margins. While some of the past years’ winning trades might come under pressure, the current phase can offer opportunities, as such corrections tend to engulf stocks without proper differentiation.
Amid the prospect of tighter monetary policy, we believe the key will be selectivity and valuation discipline. As the first earnings reports demonstrate, certain companies continue to deliver tremendous value and remain key enablers of our increasingly digital way of life.
While acute nervousness brutally punishes the under-delivering high flyers – as Netflix’s 20% down day can attest – others such as Microsoft continue to arguably earn their high value through profitable and sustained growth, while also seizing opportunities to invest and opportunistically acquire unique assets, such as Activision, when possible.
More than ever, fundamentals will matter for returns in what looks increasingly like a potentially volatile 2022 for financial markets as a whole. Remaining somewhat cautious for now, the Sturdza Family Fund entered into some hedging strategies, while also looking to harvest some of the elevated volatility via put option sales on certain individual positions.
In terms of contribution, Activision (+0.20%), Global Payments (+0.14%) and Mastercard (+0.10%) were the largest positive contributors, whilst Iqvia (-0.22%), Keyence (-0.21%) and Thermo Fisher (-0.21%) were the largest detractors.
In-line with market dynamics, the portfolio was impacted by strong style rotations, benefiting value / economically sensitive stocks (e.g. Berkshire Hathaway), while secular growth, particularly when handsomely priced, faced valuation pressures (e.g. S&P Global, Moody’s). Idiosyncratic dynamics, including quarterly earnings publications, also affected certain positions (e.g. Activision, Visa / Mastercard, Blackstone).
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.
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The views and statements contained herein are those of Banque Eric Sturdza SA in their capacity as Investment Advisers to the Fund as of 07/02/2022 and are based on internal research and modelling. Please click on Disclaimer Page to view full disclaimers.