Low market volatility continues


Fund Commentary
21 Mar 2017


February was a good month for the European equity market, which recovered after an unstable January. During February, the MSCI Europe Index rose from 121.99 to 125.22 (+2.65%).

The upward move commenced during the first part of the month and reached the highest level of the month (127) on 22nd February. Then, a small correction followed with a brief phase of adjustment, reaching 125 in the final days of the month.

It was a hard month for the European financial sector, as the fall of 10-year yields both in the US and in Europe was a huge headwind. The 10-year Bund yield reached 0.21% and the 10-year Treasury yield reached 2.39%. In this phase of partial risk aversion, Gold experienced a good month of recovery and closed February around $1248.

The Euro Stoxx 50 Volatility Index decreased from 17.4 to 16.3, the political fears attached to the French elections led to two sharp peaks at the beginning and at the end of the month, but the downtrend prevailed and risk aversion gradually vanished.

During the month of February, the risk premium of the main equity indices declined considerably, as the gap between the indices and their long term moving averages reached extreme levels. This mixed environment triggered a partial hedging of the long position in the Fund, as the combination of high complacency and a reduced premium tends to lead to a mixed, or even negative market move in the short term for equity markets.

The current seasonality of the equity markets is still very favorable, and the cyclical environment is good, since many statistical patterns prompted positive signals which still have to fully express their huge potential.

As long as the sector rotation which began last summer continues, the long side of the Fund will be invested in a blended combination of styles. Quality, growth, blend, smart beta and value will all be included in the portfolio at the same time. Even passive strategies can do well in this kind of environment which will persist until risk free 10 year yields reach their first medium-long term target (3.25% yield to maturity for the US 10y Treasury).

As mentioned before, an excessive optimistic sentiment, very low volatility and a contraction of the risk premium has led the Investment Adviser to partially hedge the long equity exposure in the short term. However, as long as seasonality is still a huge tailwind, the long equity exposure will not be fully hedged. The focus will be to increase the net long exposure once the risk premium is more favourable.

The views and statements contained herein are those of Sofia SGR in their capacity as Investment Adviser to the Fund as of 20/03/2017 and are based on internal research and modelling.