International Developments Affecting Global Risk Aversion


Fund Commentary
13 Jul 2015


The month of June saw the US equity market give back most of its 2015 gains, while the fund outperformed by 0.4% to produce +5.7% year-to-date.

With little company-specific news, the month was dominated by international developments (Greece, China) and the outcome of the Federal Reserve’s June meeting.

With no quarterly earnings released in June and few company-specific news (excluding a few acquisitions,), many market participants seemed ready to accept the status-quo of an underwhelming albeit acceptable level of economic activity in Q2 and leave for an early summer break. The FOMC’s June meeting, still seen by a few rebels as a potential launch pad for the rate hike cycle, provided more of the same: promises of further accommodation, data-dependency, cautious optimism on the strength of the economy and further lowering of future rate expectations. Mrs Yellen once again acknowledged the international scene, confirming it as a relevant input in the committee’s outlook. All in all, while the debate rages on regarding the date of liftoff, few nuggets were found in Mrs. Yellen’s speech. It remains an open question whether fundamental data, in an unsupportive international context, can possibly change by a wide enough margin to compel the Fed to act in September, knowing they have not necessarily “prepared” the market for it; absent some significant evolution in their risk/reward calculus, it is fair to expect further delays.

Toward the end of the month, Greece and China made a noted entrance and spoiled the low-volatility environment that had characterised the majority of the second quarter. Negotiations between Greece’s creditors and its confrontational government, took a turn for the worse and without a clear idea of the consequences of a “Grexit” nor a path toward a solution, markets corrected to price-in this uncertainty. The significant correction in Chinese equities, also taking a turn for the worse in the second half of the month, undoubtedly added pressure to an already fragile risk appetite and energised the China Economy Bears. At time of writing, both of these situations are ongoing. However, the Investment Adviser notes that outside of the general global market reverberations, the Fund, focusing on high quality US companies, does not find itself directly exposed to the volatility emanating from either of these markets. While remaining optimistic on both fronts, especially in terms of the ability for the US equity market to avoid direct financial contagion, the Investment Adviser nonetheless remains cognisant of the ever present potential for surprise and “unknown unknowns”, as the above-average cash position can attest. While the situation will be monitored closely, the Investment Adviser remains very enthusiastic of the current portfolio and believes that while prices will be volatile, fundamentals for the Fund’s companies remain highly compelling. In addition, this episode could provide opportunities to redeploy capital in high quality secular growing, US companies illegitimately penalised by broad risk-aversion. Beyond the immediate term, once again international turmoil could shed a light on the attractiveness of some dollar denominated, high quality US companies and could eventually catalyse a relative outperformance of a number of US equities going forward.

The views and statements contained herein are those of Sturdza Private Banking Group in their capacity as Investment Advisers to the Fund as of 09/07/15 and are based on internal research and modelling.