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deMarket Development: In September, the MSCI World Index (total returns in USD) lost 9.3%, the EURO STOXX 50 (net returns in EUR) fell 5.57%, whilst the S&P 500 (total return) also ended the month in the red, returning -9.2%. The Dollar Index (DXY Index) gained 3.14%, whilst the generic 30Yr Treasury yield increased from 3.30% to 3.87%, and the VIX increased from 25.9 to 31.6.
September saw a number of the bearish dynamics regain force and push risk assets broadly and firmly lower. Whether political, geopolitical, monetary or technical, the month was another reminder of the myriad of challenges facing the global economy currently.
In Europe: a victory for the far-right party in Italy; coupled with increases in benchmark interest rates; amid a flurry of signs that the ECB will remain focused on rate hikes to tame inflation beyond their 75bp rate hike, have pressured both the Euro and asset prices.
Even if the ECB refrained from forecasting a recession, PMIs contracting further, to 48.2, placed a toll on economic projections, providing a concrete context to the increasing number of companies issuing profit warnings.
The political situation in the UK only added to the fire, with Mrs Truss’ economic plan sparking a technical selloff in GBP assets from pension funds, including long-term government and high-grade bonds. With a reversal taking place at the time of writing, the credibility of the UK government has taken a hit, as has the appetite for UK risk assets.
In the US, the inflation print came out above expectations, pressuring the Federal Reserve to maintain its hawkish message and raise short-term interest rates another 75bps to 3.25%, with an eye towards 4.6% in 2023 in the dot plots. With employment numbers remaining strong, the hopes of a peaking inflation rate were dashed, sparking more de-risking.
Lack of progress on the Ukraine front, coupled with additional tensions with China, and the upcoming mid-term elections, did nothing to support investor optimism, which remains very bearish as proxied by the AAII bull / bear positioning surveys.
The debate surrounding peak inflation, structural inflation and the new “neutral” rate of interest, will likely continue for the time being, and day-to-day market gyrations in virtually all tradable assets remain directly linked to it.
With liquidity being removed from the system via quantitative tightening (“QT”), signs of technical tensions have begun to materialise with the example of the UK in September, which will put pressure on Central Banks and governments to find the right policy mix to address these competing objectives.
Short-term bounces could easily follow such heavy corrections based on flows, although, in our view, volatility remains the unfortunate reality of current financial markets.
Market Outlook
In the past two monthly commentaries we wrote that “With the market dissecting every word coming from Jerome Powell and the Federal Reserve, volatility continues to be the name of the game”. We remain very much aligned with this view today and maintain a defensive positioning within our mandate.
We continue to view the current environment as carrying a number of known risks, including a challenging energy backdrop in Europe; a lack of progress on the Ukrainian front; ongoing liquidity reduction from Quantitative Tightening in the US; and signs of market stress broadening.
While it is anyone’s guess where the market will eventually find its bottom, with significant volatility and correlation in markets today, we believe that individual companies’ characteristics are increasingly discarded and drowned out.
This is providing the opportunity to focus on the highest quality franchises, at attractive prices, with an eye on long-term returns. Clearly, the past month’s volatility shows that compelling entry points are emerging on a number of leading, growing companies, with strong balance sheets and pricing power, which will be the source of future real returns.
Portfolio Development
The Sturdza Family Fund‘s NAV decreased by 6.21% during the month, reflective of the correction in markets and the increase in yield.
In terms of contribution, our modest new protective put option position led the way with a +23bps contribution, followed by Maravai (+6bps), Autozone (+1bp) and O’Reilly (+1bp).
On the detractors’ side, the bottom performers were Centene (-27bps), Adobe (-23bps), Iqvia (-22bps), Meta (-19bps) and IFF (-19bps).
In line with our outlook, the Fund remains active, looking for opportunities to upgrade the quality of the portfolio and focus on strong franchises offering growth, reasonable valuations and limited economic exposure.
Amid high levels of volatility, redeploying capital to the strongest ideas, and applying our put strategies to capture significant premiums in exchange for disciplined reinvestments at a lower price remains a priority.
The Fund also initiated a small position in a midcap bioprocessing firm, Maravai, offering significant upside potential, long-term growth and high quality within a largely acyclical end-market. We reduced the Fund’s exposure to Japanese equities in September, given the perception of both micro and currency-related headwinds forming.
The Fund also closed its positions in Prosus and HCA, preferring to reallocate capital to stronger and less economically sensitive investments, notably Medtech and Ingredients.
On the fixed-income side, the Fund retains a short-duration bias with a small exposure towards the IG corporate market on first-rate issuers, with an eye on further profiting from increasing yields and credit spreads in the high-quality segments.
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.
Adam Turberville
Director
+44 1481 742380
a.turberville@ericsturdza.com
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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 16/09/2022 and are based on internal research and modelling. Please click on Disclaimer Page to view full disclaimers.