Following a difficult end to 2018, when equity markets were rattled and government bonds rallied, market participants were focused on Central Banks statements as other points of concern (i.e. growth slowdown in China, US-China trade negotiations, Brexit, Italy’s deteriorating situation etc.) had to be digested with patience.
After the sharp tightening of financial conditions following the FOMC’s December meeting and Powell’s initial dovish statement in Atlanta, the Fed’s “refreshed” language left no room for doubt on its dovish/supportive stance. Data dependence has been the Central Bank’s credo for a while, but the last meeting held in late January saw that stance evolve to a “show us” state of policy. Additional rate hikes now require situational justification, in contrast to the gradual, pre-defined path that has previously been in place. This move however, is not in response to a new perception or a more pessimistic evaluation of the economy’s current state, but has been justified by negative changes in overall risk perception/potential. The Fed also added “sustaining the expansion” to its objectives as it upgraded a multitude of mainly pre-existing and known cyclical risks.
Turning to the future path of the policy rate, 2019 still seems poised for a hike. In order for no rate hikes to occur, 15 FOMC participants must shift their “dot plot” by the end of the year. While not impossible, this scenario seems most consistent with an adverse outcome which appears unlikely considering the current sentiment within the economy. In the absence of a strong negative scenario, the Investment Adviser expects more tightening this year, particularly if the labour market remains strong or produces any upside surprises. In addition, the shift in tone and perception was also adopted by other Central Banks, and coupled with encouraging interim news on various geopolitical risks, helped equity markets rebound from their 2018 lows.
The Sturdza Family Fund was successfully launched on 14th December. The strategy has not been substantially modified before year end and January was the first “full month” of portfolio management. The Investment Adviser has gradually decreased the portfolio’s allocation to equities in order to increase exposure to US Treasuries. The January rebound was deemed substantial in light of the many risks that are still lingering. The gradual switch is still an ongoing process and may change depending on various outcomes.
In terms of positive contributors to the Fund’s return in January, Celgene was the largest followed by Facebook and Royal Caribbean Cruises whilst the largest detractors over the period were Kose followed by Shiseido and Medtronic.
The Investment Adviser’s outlook hasn’t changed significantly since December. The Team still expects an overall range-bound equity market with a small upside over the next year if matters move in the right direction. That said, this is not a bearish statement. Growth is still positive and companies that are able to surprise in terms of their earnings resiliency or growth outlook are expected to perform well in relative terms. The cycle is slowing, even though at different phases across major regions, but it is because earnings growth is still expected to be positive in 2019 and sentiment is not stretched, that the Investment Adviser maintains their grounded outlook. Some companies and/or sectors may see their growth accelerate as they reap the benefits from ongoing fundamental trends that are not as directly correlated with the general state of the economy. In addition, one must not forget that during downturns, companies that enjoy strong moats or have superior offerings typically gain market share, and as such, tend to have stronger earnings resiliency than initially anticipated and are likely to rebound more quickly.
The views and statements contained herein are those of the Eric Sturdza Group in their capacity as Investment Advisers to the Fund as of 18/02/19 and are based on internal research and modelling.