Macroeconomic Update

MACRO BACKDROP Markets have recently been driven by different events such as Greece, the Chinese slowdown, the normalisation of the Fed’s monetary policy in the US or the unprecedented volatility and lack of liquidity in bond markets, provoking an unexpected sharp rise in German yields. It is as though we have forgotten that there is a crisis in Ukraine and a war against ISIS in Iraq and Syria. Obviously, the Greek crisis is currently the major event and almost every market has been impacted by this dra(ch)ma.

Fund Commentary
3 Jul 2015


Markets have recently been driven by different events such as Greece, the Chinese slowdown, the normalisation of the Fed’s monetary policy in the US or the unprecedented volatility and lack of liquidity in bond markets, provoking an unexpected sharp rise in German yields. It is as though we have forgotten that there is a crisis in Ukraine and a war against ISIS in Iraq and Syria. Obviously, the Greek crisis is currently the major event and almost every market has been impacted by this dra(ch)ma.

It is very difficult to analyse the impact of the Greek crisis on financial markets because we are chartering unknown territory and nobody really knows what theconsequence of a Grexit would mean for the markets but, first and foremost, on the European economy. The two major scenarios, “happy ending” and Grexit, should lead to the following market behaviours:

• If a “last minute” solution is found and/or the Greeks vote ”Yes” on Sunday 5th July and Tsipras resigns, risky assets should rally (equities, corporates and financials, peripheral sovereigns). Safe havens such as the Bund and US Treasuries by contagion decrease (i.e. yields increase). In the FX market, it is unclear but safe havens such as CHF and USD could weaken.

• Should the Grexit scenario become more likely, safe havens would rally (Bund, US Treasuries, USD, CHF) and risky assets could go south. Could they collapse? The probability is very low because Central bankers (and first and foremost the ECB) would immediately extinguish the fire. Mr “whatever it takes” Draghi would not hesitate to announce exceptional measures such as an increase of the ECB’s QE.

During the last two weeks, we experienced a lot of volatility but no panic. Given the importance of these extreme scenarios, a 4-5% correction is not really a sell-off, just a correction. Markets do not operate as in the past: remember September 11 or Lehman Brothers. We also note that gold has completely lost its status as a safe haven asset and “natural hedge to the fat tail scenario”. Finally, the big question mark is: do Central Banks still have the power to avoid turmoil in financial markets? We think so.


Strategic Europe Value Fund

The answer is that we do not really know what the impact on the markets will be of a Greek exit.

I have been surprised by the downside move, but from a longer term perspective this is a better entry point for the market. The market was due a correction anyway due to the strong run it has had.

If Greece does decide to turn its back on the Troika and default on the ECB loan in July, things will be nasty for Greece although from an European economic point of view perhaps not that significant. Markets should stabilise after an initial correction and rebound given the gently improving economic outlook. However, if the Troika is seen
to give in, then the whole issue of contagion will raise its ugly head with negative implications for the pricing of risk assets. The actions of the ECB will be of paramount importance.

Strategic European Smaller Companies Fund

Recent volatility in European stock markets caused by the announcement of the Greek referendum over the weekend will undoubtedly create opportunities for the Strategic European Smaller Companies Fund. Greece represents 3.3% of the Eurozone population and 1.8% of the Eurozone GDP. As such, whatever the result of the referendum and the issue of the negotiations with the creditors shall be, its influence remains limited. The risk of contagion in other European peripheral economies has
substantially diminished since 2011 with ECB backstops in place as evidenced by the response of government bonds spreads since the beginning of the week. The Fund holds no investment in financial companies and its investments have no exposure to the Greek economy. Our belief is that clarity should emerge reasonably quickly and the main attraction of European stock markets remains valid: strengthening of the US$ versus the €, consumer confidence improving thanks to the decline in energy prices, BCE’s accommodative policy. In the meantime, we’ll do our best to exploit market volatility to reinforce the Fund’s investments at more attractive levels.

Strategic US Momentum & Value Fund

The situation unfolding in Greece has been capturing our fullest attention for some time. Outside of the general market reverberations caused by this turn of events, the Fund, focusing on high quality U.S. companies, does not find itself directly exposed to the volatility emanating from the Greek and European markets. While our main assumption remains that a deal should be attainable, our belief is that most of the textbook transmission mechanisms that could have made this a systemic event have been previously dealt with, most notably the European financial sector’s holding of Greek government debt. Additionally, the tools now at the ECB’s disposal, in contrast to those available at the time of the Greek debt restructuring, also comfort us in believing this episode can be contained. We nonetheless remain cognizant of the ever present potential for surprise and “unknown unknowns”, as our above-average cash position can attest. While we intend on monitoring the situation closely, we feel very enthusiastic of our current portfolio, and do believe that while prices could be volatile, no significant fundamentals are at risk in our strong U.S.-centric portfolio should tail scenarios come to materialize. In addition, we will remain on the lookout for opportunities to redeploy capital in high quality secular growing U.S. companies illegitimately penalized by broad risk-aversion.

Strategic Euro Bond Fund & Strategic Global Bond Fund

Strategic Euro Bond Fund – Due to the extremely low risk profile of the Fund, we are very cautious. The volatility of the Bund led us to decrease the duration risk of the Fund in May, from 2.7 to 2.1. As the Fund is 100% invested in Investment Grade bonds, we are obviously not invested in Greek bonds. More importantly, in early January, we sold our remaining exposure to Spain and Italy in order to avoid high volatility and lack of liquidity of these assets. We believe that once the situation is clarified in Greece the Bund will stabilise and that the ECB will continue or reinforce its “whatever it takes” policy. As the main role of bonds in an asset allocation is to be a natural hedge for any decrease in equity markets, we are very rigorous in our bond picking as we pay close attention to the correlation between our portfolio and equity markets.

Strategic Global Bond Fund – We are not invested in Greek assets and we also sold our exposure to the periphery (Spain, Italy as well as Portugal) in January. We also decreased the duration of the Fund in May (currently below 5) but we are still convinced that the US Treasury curve will flatten. Consequently, we are more than ever invested in 30y maturities (10% of the Fund but 38% of the duration risk), partially hedged by a short 5y T-note future position. This investment (long bond denominated in USD) is the ultimate “hedge of the fat tail risk” even if we believe that any big accident in the markets is unlikely because it should be promptly managed by Central Banks intervention. First and foremost, we continue to analyse the US economic statistics and the behaviour of the Fed because they remain the key drivers of the evolution of the US bond market. Secondly, we are closely following the Greek crisis should it give us opportunities to more actively manage our duration risk.

Strategic China Panda Fund

After a long period of growth the Shanghai Stock Exchange Composite Index experienced a 13% drop last week, making it the most significant decline in the last few years. However, this trend was generally accepted as a healthy and long overdue correction, and “not the beginning of the end”. Worries remain about the small cap market, as some stocks trade at a P/E ratio around 100x, which could be an indicator of a growing bubble. The A – H share valuation gap, represented by the Hang Seng China AH
Premium Index, was at a peak on 10th of June with a rate of 143, before declining to its’ current level of 124, hence A shares are still trading at a 24% premium to their H share peers.

In the midst of the correction, we saw large caps, especially in A shares, record gains as investors finally switching back to defensive large caps from the small/mid cap “theme stocks” with over 100x PE. This is positive for fundamental managers like us as a majority of our portfolio consists of large caps.

(Comments as at 25.06.15)

Nippon Growth (UCITS) Fund

In the short term, global markets will be influenced by the developments in Greece. But in the longer term, whatever happens in relation to Greece, the impacts will be rather small for the global economy and very small for Japan, as far as this matter is contained within Greece. I hope that this is the case. Japan can continue its growth trend with strong domestic demands; therefore we do not see current global macro developments impacting on our portfolio as the appreciation of the yen would be within our expectation.


For clarity the funds managed by EI Sturdza Investment Funds do not currently hold any exposure to the Greek equity or Bond markets.


First and foremost, risk and volatility are the key drivers of the behaviour of our Investment Advisers (both equities and fixed income). They are not invested in Greek assets and, in this troubled period full of uncertainty, they are not very aggressive. On the other hand, they all believe that every correction provides buying opportunities. We believe equity markets will continue to perform and that bonds will not collapse. More importantly, we are confident our Investment Advisers will take advantage of these more difficult markets to demonstrate their talent. Consequently, we remain convinced that investing in our Funds, with a balanced asset allocation between bonds and equities, should continue to generate solid returns in the coming months.

The views and statements contained herein are those of the Investment Adviser to the EI Sturdza Funds PLC as of 30/06/15