Market Development: In July, the MSCI World Index (total returns in USD) gained 7.94%, the EURO STOXX 50 (net returns in EUR) appreciated by 6.25%, whilst the S&P 500 (total return) also ended the month in the positive, returning +9.22%. The Dollar Index (DXY Index) gained 1.16%, whilst the generic 30Yr Treasury yield decreased from 3.18% to 3.01% and the VIX decreased from 28.71 to 21.33.
Following a sharp correction in June, the market rebounded strongly towards the end of July with the S&P printing its best month since November 2020, and the best July for almost a century. This rebound is largely the result of three factors: first, an earnings season generally seen as rather solid; second, a tone by the Federal Reserve seen to be an indication of more dovishness to come; and third, the historical pessimism towards equities recorded in June, that likely sowed the seeds for such a strong bounce.
It is noteworthy that an above-expectations inflation print in July, followed by a logical 75bps interest rate rise by the Federal Reserve, did not negatively impact the market this time – as it did so forcefully the previous month.
Many investors interpreted Jerome Powell’s press conference as a tilt towards a subtle dovish message:
• Did his views on the neutral rate and his “data-dependency” for the coming months mean that he views the economic slowdown as evidence of slowing inflation, implying less need for steep future interest rate hikes?
• Does the fact that the economy is now in a technical recession mean that the cost of capital will stop increasing?
The market has certainly voted, with an inverted 2-10Yr Treasury curve and a significant rally on the so-called “long-duration” assets, including tech equities.
On the other side of the Atlantic, the ECB had to deal with its own set of challenges: increasing inflation supported by a weak Euro, as well as spreads of peripheral government bonds reaching significant levels, with a governance crisis in Italy and a worrying deterioration of natural gas supply looming over the old continent.
Ms Lagarde responded with a 50bps hike and a plan to intervene in government bond spreads, a welcome message that did not entirely assuage investor fears over Europe’s complex predicament. On the whole, messages from both central banks to move towards more “data dependency” underscores the lack of clarity on the global macroeconomic front.
Equity markets were relieved by corporate earnings that, on average, were quite reassuring. The large tech companies, so critical to the indices given their weight, did not come off unscathed but showed resilience.
Overall, the messages from Alphabet, Microsoft, Amazon and Apple were of decelerating growth rates, but no catastrophic accidents. Even Netflix, a significant underperformer this year, was able to stop its underperformance following soft (but above expectations) user numbers.
According to its recent guidance, Meta continues to be impacted by both the advertising environment and TikTok’s increasing market share, with few quick fixes in sight.
While currency headwinds were an impactful topic for US-based multinationals, more than 80% of companies exceeded earnings expectations and around two-thirds beat revenue expectations so far. While these numbers are below the last two years, they remain above long-term averages.
With the market dissecting every word coming from Jerome Powell and the Federal Reserve, volatility continues to be the name of the game: after a significant down month in June, markets have shot back up in the hope that the worst of interest rate policy is behind us.
The key question remains the balance between the degree of the ultimately necessary slowdown / recession, and the interest rate path, and many variables – including geopolitics – are at play. For now, it seems to us that markets will continue to face a more restrictive monetary policy with a higher than average rate of inflation.
In our view, such an environment reinforces the importance of maintaining some degree of defensiveness, while focusing on companies exhibiting stability and economic resilience.
The Sturdza Family Fund ‘s NAV increased 4.52% during the month (A USD class), reflective of the strong rebound in equity markets.
In terms of contribution, Worldline led the way (+25bps) with its third strong earnings in a row, followed by Apple (+21bps), Centene (+21bps), Amazon (+21bps) and Mastercard (+16bps). On the detractor side, Alibaba led the way (-15bps), followed by Comcast (-4bps), Meta (-2bps) and Albioma (-2bps).
In line with our outlook, the Fund remains active, looking for strong companies offering asymmetric risk / reward opportunities. Having exited our protective put positions in June, the net equity allocation of the Fund nevertheless remains on the defensive side. On the fixed-income side, the Fund retains a short duration bias with a small exposure to the IG corporate market on first-rate issuers.
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.
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The views and statements contained herein are those of Banque Eric Sturdza SA in their capacity as Investment Advisers to the Fund as of 05/08/2022 and are based on internal research and modelling. Please click on Disclaimer Page to view full disclaimers.