Market Development: In February, the MSCI World Index (total returns in USD) declined 2.5%, the EURO STOXX 50 (net returns in EUR) dipped by 2.6%, whilst the S&P 500 (total return) also gave back 3.1%. The Dollar Index (DXY Index) gained 0.2% over the period, whilst the generic 30Yr Treasury yield increased from 2.11% to 2.17% and the VIX moved up from 24.83 to 30.15.
On 24th February, the world watched in disbelief as Russia launched its invasion of Ukraine. The thought of war at Europe’s doorstep is sobering and will bring a multitude of ramifications.
Before dryly delving into the economic and market implications, let us first underscore the tragic human toll this development represents. Our thoughts are with everyone directly impacted by these events.
While February initially welcomed a rebound of equities from the January lows, the worst kind of geopolitics entered the fray with Russia’s move against Ukraine, sparking an additional move down. At the time of writing, the situation has escalated dramatically with significant casualties and additional rounds of broadly unified sanctions imposed by the west impacting the global economy in a myriad of ways.
Beyond the threat of a global escalation, Russia and Ukraine’s significance as producers of global commodities, from natural gas and nickel to wheat, is threatening economic stability globally by impacting the already fragile, post-COVID supply chains and launching significant inflationary pressures, both directly and indirectly. This only adds complexity to the western hemisphere’s challenges, with inflation and the repercussions from the central banks’ interest rate policies.
Stuck between a rock (the highest CPI readings in decades) and a hard place (the potential for a significant slowdown in economic activity), the Fed and the ECB’s job just became much harder this month. The market is reflecting this key set of uncertainties with historical volatility and broad rotations, re-engaging with almost forgotten sectors such as Defence and Oil & Gas Exploration, while second and third-order exposures towards Russia and Ukraine are being re-evaluated almost daily.
Against this backdrop (at the time of writing), the announcement from the ECB to accelerate the end of its asset purchase program signals their concerns on the inflation front, especially as the Euro depreciates in value and the old continent will be the most exposed to the ensuing economic activity drop. In our view, these dynamics support a differentiated response in terms of stock selection and allocation from past market drawdowns, given western central banks’ inability to ease financial conditions and support asset prices.
Globalised economies have benefitted from decades of increasing trade and linkages, allowing for a “peace dividend” to support significant efficiency and productivity gains. The current situation threatens this state of affairs, with regrettable consequences all around, something we believe the markets are now looking to better understand and price.
Looking forward, visibility remains limited as markets remain geared to short-term dynamics unfolding in the Ukraine / Russia situation. With significant spikes in volatility, select opportunities seem to be materialising, although the above-mentioned monetary policy and inflation dynamics add complexity to finding clear valuation support.
The Sturdza Family Fund’s already conservative equity positioning was further reduced, although at the margin, to further enhance the ability to reposition in attractive investments once visibility improves. Significant levels of volatility and increased risk aversion open the door for attractive opportunities on selling puts in quality individual names, a strategy that will likely be the first vector to re-enter equity markets in the future.
Given this unfavourable backdrop, the Sturdza Family Fund has shown relative resilience with a -2.2% return for the month, reflective of a more defensive allocation positioning.
In terms of contribution, Centene (+0.14%), Worldline (+0.09%) and Becton Dickinson (+0.09%) were the largest positive contributors whilst Meta (-0.54%), Fidelity National (-0.18%) and Global Payments (-0.15%) were the largest detractors.
In-line with market dynamics, the portfolio was impacted by strong style rotations, particularly benefitting commodity-driven names (absent from the portfolio), while European exposure and secular growth faced valuation, especially when dogged by idiosyncratic challenges such as was the case for Meta.
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.
+44 1481 742380
The views and statements contained herein are those of Banque Eric Sturdza SA in their capacity as Investment Advisers to the Fund as of 14/03/2022 and are based on internal research and modelling. Please click on Disclaimer Page to view full disclaimers.