TINA, inflation and Ukraine

Market Development: In March, the MSCI World Index (total returns in USD) bounced back by 2.7%, whilst the EURO STOXX 50 (net returns in EUR) by 2.4% and the S&P 500 (total return) led the way with a strong +3.7% return. The Dollar Index (DXY Index) gained 1.7% over the period, whilst the generic 30Yr Treasury yield increased from 2.17% to 2.45% and the VIX fell back to 18.55.

Fund Commentary
14 Apr 2022

Market Development: In March, the MSCI World Index (total returns in USD) bounced back by 2.7%, whilst the EURO STOXX 50 (net returns in EUR) by 2.4% and the S&P 500 (total return) led the way with a strong +3.7% return. The Dollar Index (DXY Index) gained 1.7% over the period, whilst the generic 30Yr Treasury yield increased from 2.17% to 2.45% and the VIX fell back to 18.55.

To describe March as volatile would be a notable understatement. On the back of the Russian invasion of Ukraine, equity markets reacted violently to the uncertainty generated by such a historical turn of events.

Europe bore the brunt of the volatility with the early days of the month experiencing large daily drawdowns and a spike in the cost of insuring equity risk (VIX & V2X), to finally rebound towards positive month-to-date performance. In addition, fears of deteriorating relations with China catalysed a stark selloff in the region, which was later partially reversed by strong words from the Chinese government on its intention to stabilise markets.

All in all, fundamental uncertainty gripped market participants, especially given the implications of current dynamics on what was supposed to be the challenge of the year, i.e. inflation and its feedback on monetary policy. Given this limited visibility, equity markets’ rebound has been striking, and likely reflects a mixture of an existing bearish sentiment combined with the anticipatory nature of markets, now focused on migrating towards less inflation-sensitive asset classes, including equities.

Interestingly, while the acronym TINA (There Is No Alternative) became popular in the low-interest-rate environment of recent years to describe the scarcity of viable investment alternatives apart from equities, it seems the market has once again embraced equities, this time for its ability to generate inflation-adjusted returns.

This bounce has materialised independently of the Federal Reserve hiking its policy rate by 0.25% and communicating a steeper expectation for future rates, given the low unemployment and high inflation readings that look all but persistent for the coming quarters on the back of the extraordinary additional pressures on supply chains and raw materials engendered by the Russian invasion of Ukraine.

Indeed, commodity prices continued to rise during the month, with Oil, Natural Gas and Nickel all increasing by double-digit percentages, while soft commodities also increased from mid to high single-digit percentage points. Such dynamics are pushing global economists to review their growth expectations downward, while central banks adopt a more hawkish tone. In line with these dynamics, the US rate curve flattened while moving up, sparking a debate around a possible inversion and its recessionary predictive power.

In Europe, the effects of the Russian aggression on key demand indicators became more evident with consumer confidence pointing down in March, inflationary concerns in France printing a historic high and the ZEW and IFO indicators on the German corporate side also sliding during the month.

Market Outlook

Looking forward, visibility remains limited as markets remain geared to short-term dynamics unfolding in the Ukraine / Russia situation, while the inflation picture and the central banks’ response to it continue to weigh on valuation multiples across the board. While the healthy US economic momentum supports an outperformance versus Europe, inflationary pressures are also more prevalent across the pond, adding to our expectation of greater volatility overall.

The Sturdza Family Fund‘s conservative positioning, with a low duration on the fixed income side and relatively low equity exposure, continues to be the profile deemed appropriate for the current market.

Volatile markets, as experienced during the month, will likely create opportunities for reinvestment in quality companies in the future, and we await the upcoming earnings seasons for additional colour from the ground.

Portfolio Development

The Fund’s NAV appreciated 0.88% during the month, reflective of a more defensive allocation positioning.

In terms of contribution, UnitedHealth (+0.14%), Autozone (+0.13%) and Thermo Fisher (+0.12%) were the largest positive contributors, whilst Worldline (-0.22%), Nitori (-0.14%) and Installed Building Products (-0.08%) were the largest detractors.

During the month, the Fund initiated new positions in companies exposed to the energy CapEx cycle due to the increasing visibility resulting from both years of underinvestment and now a strategic imperative on the part of the US and Europe. Many of these companies serve both renewables and traditional energy production while having made significant efforts to improve their own ESG profiles.

The Fund also initiated new positions in the healthcare sector, in companies offering catch-up opportunities after years of COVID disruptions, while having resilient economics in the face of inflation.

In Europe, we also initiated throughput options, and exposure in alternative asset manager EQT, a leading firm known for its long and successful track record in private equity, offering strong economics and growth for a reasonable valuation given the downturn in assets during the first half of the month.

Amid the early month volatility, the Fund was also able to seize a compelling, “special situation” opportunity in Albioma – the renewable French electricity utility that has been approached by a large infrastructure firm to discuss the possibility of a takeover. The slow market reaction to this news provided an opportunity for the Fund to capture short term upside in a company with compelling fundamental value and high strategic appeal.

On the other side of the ledger, the Fund disposed of its small remaining stake in Arthur Gallagher and Estee Lauder, which had reached valuation targets.

Given the reigning uncertainty, the Sturdza Family Fund retains a conservative profile overall and chooses to seize opportunities mainly via the selling of money put options on existing names, positioning the Fund to purchase attractive companies at lower prices in exchange for significant premia in the face of a volatile market.

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 TurbervilleAdam Turberville
+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 08/04/2022 and are based on internal research and modelling. Please click on Disclaimer Page to view full disclaimers.