Volatility makes quite the entrance


Fund Commentary
18 Sep 2015


The month of August saw global equity markets retrace meaningfully, triggered by fears of a global growth deceleration catalysed by Chinese weakness.

Global indices were down significantly, with the MSCI World (USD) at -6.8%, the Hang Seng (USD) at -12%, the EuroStoxx 50 (USD) at -7.5% and the S&P 500 at -6.3%.

These end-of-month numbers however obscure the fact that at its worst, the correction was of significant proportion, even earning Monday 24th the moniker “Black Monday”. Indeed, it carried many of the traits of a panic selloff, with indiscriminate selling, pushing some blue chips stocks below -20% at opening, and accompanied by a flaring volatility index (VIX) heading back to levels not seen since Q1 2009. The Fund, after having slightly underperformed the market in the first two weeks of the month, showed its resilience by being down merely -2.7% on black Monday, compared to -4% for the market at the time of close.  

While the Chinese situation remains hard to decipher, it is a fact that growth is below expectations and the rebalancing of the economy towards more consumption remains somewhat of a disappointment for now. However, the extent of the linkages between the Chinese situation and the US domestic economy should also not be overestimated. Currently trending at around 2.5%, growth in the US economy remains more than acceptable, and shows signs of robustness in critical areas such as consumer balance sheets, housing, household formation, consumer sentiment, employment and new job openings. With a strong dollar favouring imports and consumption, one can further expect pockets of strength in such areas. A further point, and a central tenet of the Fund’s philosophy, is the importance of comparing and contrasting GDP numbers with the significant dynamics happening at the micro level, many of which are enabling some firms to continue serving and expanding their niches at double digit rates while aggregate macroeconomic numbers seem uninspiring. An interesting example was the recent comment by Tim Cook, Apple’s CEO, mentioning an acceleration of iPhone sales in China in the past weeks, in direct contrast with expectations and current macroeconomic momentum: the growth in the aggregate value of goods and services produced in China (GDP growth) could significantly differ from high-end mobile phone adoption trends, possibly for many years. The Fund’s focus on outstanding secular growth companies embraces such divergences by investing in businesses exposed to company-specific tailwinds rather than blunt macroeconomic cyclicality, and for this reason the Investment Advisor remains more than ever enthusiastic of the Fund’s underlying companies in these times of volatility.

The views and statements contained herein are those of Sturdza Private Banking Group in their capacity as Investment Advisers to the Fund as of 16/09/15 and are based on internal research and modelling.