Political risk in Italy affects European periphery


Fund Commentary
26 Jun 2018


​The month of May showed a pronounced dispersion of returns, with US equities demonstrating strength (S&P 500 PR: +2.16%), supported by growth and quality companies (MSCI USA Growth: +4.18% and MSCI USA Quality: +3.52% respectively), with the tech sector best in class again (S&P 500 InfoTech: 7.13% ).

On the other side of the spectrum, the European markets delivered negative returns due to a growing perception of an anti-Euro sentiment following the creation of the new Italian government lead by the “Five stars movement” and the “Northern League”. The political risk in Italy had a large effect on the periphery (FTSE MIB: -9.15% and Ibex35: -5.16%).

Throughout the month, the Quality investment style outperformed the Growth and Value styles in Europe (+2.65% vs +2.07% and -3.34% respectively), with “basic resources” being the best performing sector. Following the outflow of international investments, the Euro experienced a sharp depreciation against the USD and returned to a similar level as exhibited at the end of 2017.

In May, the Fund gained +0.26%, which allowed it to almost close the gap, with the Fund’s year to date performance as at the end of May standing at -0.34% (vs MSCI Europe: -0.22%).

The long leg of the portfolio has consistently generated alpha in the mid term, with the relative performance being good since the last portfolio rotation. Year to date the best performing investment style is “value”, with the value funds in the portfolio delivering a consistent amount of alpha. The other funds have been in line with the market and their investment style indices, the exception being the only Quality style fund in the portfolio, which struggled during the first part of the year; however subsequenlty started to recover slightly.

From a macro point of view, global growth is still solid, especially in the USA, while the best may be over in the rest of the world both from a macro and micro point of view. In the late part of 2017 the global PMIs had already discounted a high level of optimism, with the Investment Adviser still anticipating that the situation will be different at the end of 2018.

As expected, 2018 is proving more volatile than 2017. The main risks are geo-political (i.e. the rise of populism in Europe), monetary policy (the market could overreact to excessive tightening by the Federal Reserve) and a yield curve inversion in the US. This said, the Investment Adviser estimates that the latter will not however happen until the end of the year/beginning of 2019.

According to the team, the market is in the late – and not yet final – stage of the cycle, giving rise to a wide and nervous trading range, with higher volatility and high dispersion, waiting for the next bear market to materialise. Against this backdrop, the markets can still offer good opportunities throughout the year. In the Investment Adviser’s mind, the key is to protect risky assets when the markets reach the main potential inflection points, with a strict focus on volatility control required.

The views and statements contained herein are those of Sofia SGR in their capacity as Investment Adviser to the Fund as of 21/06/18 and are based on internal research and modelling.