The economic situation deteriorated further in Europe say Eric Vanraes and Pascal Perrone

By Eric Vanraes and Pascal Perrone

In September, the European Central Bank (ECB) cut interest rates and announced additional measures including a purchase program of asset-backed securities (ABS) and a larger program of quantitative easing if needed. The risk of deflation is a growing concern, which may force the ECB to dramatically increase the size of its balance sheet. In the US, economic conditions continue to send a mixed picture, where GDP grew by 4.6 in the second quarter, car sales recovered to their pre-crisis level and Federal Reserve’s “Beige Book” of economic conditions indicated that the economy was moving at a modest-to-moderate pace.

The month of September was again a tale of two markets, initially extending the August rebound to new highs swiftly followed by the first leg of a correction, ongoing at the time of writing. On the economic front, the summer’s positives were further supported, with momentum broadly assured through strong ISM (Institute of Supply Management) numbers for August, favourable news regarding the housing sector (July construction spending and August housing starts), good manufacturing data for September and a positive revision to second quarter GDP. However, unemployment numbers disappointed on lower non-farm payrolls growth and further declining labor force participation, whilst inflation was also below expectations as reported in the CPI figures for August. On the back of these two pillars of the Fed’s mandate siding somewhat together, the FOMC (Federal Open Market Committee) statement came out dovish, with the now infamous “considerable time” qualifier retained as a means to protect the Fed’s hard-earned dovish and data-dependent credentials. Inflation expectations as measured by the 5 year forward breakeven rate continued to decline to Q1 levels.The month was also marked by a series of external events, such as worrying news regarding Ebola’s advance, further unrest in the Middle East and new rules limiting U.S. corporations’ ability to enter into a tax-inversion scheme.

While some of the Fund’s names performed well (e.g. Actavis), markets remain driven by macro events and by the lack of investment alternatives.

The U.S. Dollar increased its value by 3% against a basket of major currencies, pushing down commodities including, notably, both oil and gold. While this did not have a direct impact on the Fund, the ongoing stark underperformance of small and midcap stocks generally pressured some of the Fund’s names and raised questions among some market participants as to whether these divergences were indicative of market fatigue.

All in all, while some of the Fund’s names performed well (e.g. Actavis), markets remain driven by macro events and by the lack of investment alternatives. As previously mentioned, valuations remain as undifferentiated as they have been for years, emblematic of the environment in place this year. As always, the Investment Adviser remains focused on the investment process and on assessing the opportunities as they arise in the market.

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Commentary provided by Banque Eric Sturdza in their capacity as Investment Advisers to the Fund as of 09 October 2014

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