An inflection point? Getting closer but not yet…

Market Development: In December, the MSCI World Index (Total Returns in USD) appreciated by 4.3%, the EURO STOXX 50 (Net Returns in EUR) returned +5.8% and the S&P 500 (Total Return) increased by 4.5%. The Dollar Index (DXY Index) weakened slightly by -0.34% over the period, whilst the generic 30Yr Treasury yield increased from 1.80% to 1.90% and the VIX stabilised, back down to 17.22 from 27.19.

Fund Commentary
18 Jan 2022

Market Development: In December, the MSCI World Index (Total Returns in USD) appreciated by 4.3%, the EURO STOXX 50 (Net Returns in EUR) returned +5.8% and the S&P 500 (Total Return) increased by 4.5%. The Dollar Index (DXY Index) weakened slightly by -0.34% over the period, whilst the generic 30Yr Treasury yield increased from 1.80% to 1.90% and the VIX stabilised, back down to 17.22 from 27.19.

During the final weeks of 2021, equity markets rallied back to fresh highs, interestingly enough, on the back of Federal Reserve Chairman Powell’s hawkish speech in light of growing inflation fears.

With US CPIs reaching levels not seen in decades, data in Euro regions showing sharp increases, and a freshly created political coalition in Germany announcing its commitment to raise minimum wages by 25%, the narrative for continued elevated inflation gained traction.

Consequently, it was not a surprise to see Mr Powell address these concerns by admitting: “the risk of persistent higher inflation has clearly risen”. He also announced the Fed’s intent to increase the pace of tapering by an additional $15bn – thereby paving the way for multiple rate hikes in 2022. At the same time, Omicron and potential variants continue to add uncertainty when it comes to global growth scenarios. Given this backdrop, why did rates not increase whilst equity markets appreciated?

In our opinion, the answer resides in a combination of ongoing factors:

1. The lack of investment alternatives;

2. the risk of systemic shocks in the market having abated, thanks to strong private sector balance sheets, well-capitalised banks and a healthy household savings rate;

3. the backdrop of negative real rates coupled with high equity risk premia suggests that, in the absence of a growth shock, equity markets are likely to continue their ascent.

Furthermore, when one considers that we are exiting a historical period of abnormal global stimulative policies, the change communicated is possibly also perceived as a necessary and healthy one, in regards to normalising the economic environment. From that perspective, the market is taking these developments in its stride, for now at least. As the economic effect of Omicron has not been as dramatic as anticipated, the growth outlook remains healthy.

Market Outlook

We remain constantly on the lookout for more investment opportunities and believe 2022 will continue to provide us with openings to generate positive returns. While it is paramount for us to warn against extrapolating the past 3 years into the future, we will continue to explore all avenues vigorously in order to generate sound long-term returns.

This will be based on a combination of fundamental performance by companies held in the equity portfolio, opportune asset allocation decisions and return-generating and complementary management of our fixed-income portfolio. After all, our main objective of compounding healthy, risk-averse returns for our investors and ourselves have not changed.

For a more detailed review of 2021 and our outlook for 2022, please refer to our published 2021 Review and 2022 Outlook.

Portfolio Development

In terms of contribution, the largest positive contributors were Centene (+0.32%), United Health (+0.22%) and AutoZone (+0.19%), whilst the largest detractors were Nitori (-0.06%), Alibaba (-0.06%) and Blackstone (-0.04%). From a sector standpoint, Information Technology, alongside Healthcare and Financials were the largest contributors over the period.

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.

Adam TurbervilleAdam Turberville
Director
+44 1481 742380
a.turberville@ericsturdza.com


The views and statements contained herein are those of Banque Eric Sturdza SA in their capacity as Investment Advisers to the Fund as of 14/01/2022 and are based on internal research and modelling. Please click on Disclaimer Page to view full disclaimers.