First sizable correction since 2011 in the context of uncertainty over global growth and volatility of emerging markets currencies


Fund Commentary
17 Sep 2015


In August, global financial markets experienced their first sizable correction in three years. In the US, the S&P 500 declined by 6.3% while in Europe, the Fund’s benchmark, the Eurostoxx 600 Net Return dropped by 8.1%. Lots has been written about reasons for the selloff triggered notably by the sharp fall in Chinese equities, the Yuan devaluation and the disappointing July PMI report in China but much of this has been building for a while and was certainly overshadowed by the outcome of the Greek negotiations.

China started rolling over in May and commodity prices have been falling for way longer. Chinese institutions have apparently decided it became too expensive to intervene and stabilise the capital markets, contributing to the selloff in Chinese equities. The value of the market to GDP in China is approximately 25% of that of the US, so the risk of contagion to the real economy should remain limited, at least on that front. It was clear that equity investors were concerned that weakness in China and an imbalance in emerging markets will present impediments to US growth and the European recovery. 

In that context, the Fund was down by 5.84% in August, outperforming its benchmark by 2.26%. The Fund’s cash portion held at the beginning of the month limited the decline. On top of that, the investment portfolio proved to be more resilient than the market in general.  Kardex was the most significant contributor to performance in August, followed by Lisi and Datalogic. At the other end of the spectrum, Kendrion, Jacquet Metal Services and Mersen were the three main detractors. The Fund took advantage of the volatility to reinforce exposure in its highest conviction calls at attractive and reasonable levels, notably Mersen, Lisi, GfK, Kendrion and Saf-Holland. 

At this stage, the Investment Adviser finds it extremely difficult to come to a conclusion as to what shall be the impact of an economic slowdown in China on the Western world. The portfolio management team are undoubtedly worried when witnessing the weakness of the Chinese construction industry. The increase of inventory levels in some other sectors (like automotive) will definitely by carefully monitored in the near future as well. The Fund had kept approximately 15% in cash since inception in May this year; however this was increased to approximately 20% of NAV at the end of August. Indirect exposure to Emerging Markets and foreign currency fluctuation risks, which were already limited last month, have been reduced to a minimum. Even if it is not the team’s desire to maintain a sizable portion of cash in the portfolio, the Fund shall retain that cushion in the near future to try and better exploit the marked increase in market volatility for the coming weeks/months. 

The views and statements contained herein are those of Pascal Investment Advisers SA in their capacity as Investment Adviser to the Fund as of 08/09/15 and are based on internal research and modelling.