A challenging month for US markets

BY ERIC STURDZA

Monthly Fund Commentary
20 Oct 2015

BY ERIC STURDZA

September was another challenging month for U.S. equity markets, finishing at -2.6% and exhibiting significant volatility in many sectors and styles. 

The long-awaited meeting of the Federal Open Market Committee ended-up confirming the status-quo, further delaying its first interest rate increase since 2006. Following the announcement, the equity market reversed its tentative rebound and focused on the implications of the Committee’s apparent doubts. The trifecta of volatile global markets, underwhelming growth and a lack of reassurance by the Committee pressured equity markets downward.

Stocks with higher growth and momentum were hit particularly hard, as profit taking and increased risk aversion coming into the 3rd quarter earnings season trumped other considerations.

Exemplifying this trend was the healthcare sector, one of the best performing in the past years, that came under intense pressure in the second part of the month after a well-known presidential candidate shared her views on how to tackle the issue of high-priced drugs. While the plan was widely seen as carrying little implementable ideas, the noise sparked a selloff in healthcare names, with little regard for subcategory and economic exposure (Pharma, Managed Care, Hospitals, etc). Biotech nevertheless led the downfall, recording its worst monthly performance since the index’ creation in 2006. The Fund, with a natural tendency to hold a number of diverse businesses in the healthcare space, was negatively impacted by these events, notably via its positions in Allergan and Valeant which were caught in the drug pricing debate while having only modest true exposure to it. Allergan, incidentally, provided additional colour on their continuing business plan after the sale of their generics department to Teva, and once again emerges in an enviable position, combining a high growth existing branded business, significant cash reserves and multiple avenues for value creation in the coming years.

In this turbulent environment, it is worth noting that many companies in healthcare and certainly those held by the Fund exhibit investment characteristics such as above-average growth, earnings visibility, strong cash flow generation, industry consolidation and lower dependency on the business cycle. These defensive and highly desirable attributes when presented at low valuations, re-main attractive propositions to long-term investors, especially in times of heightened economic growth uncertainty. The Investment Adviser, while wary of the current volatility and potential for further unfavourable rhetoric, continues to see the portfolio as highly compelling and will be on the lookout for opportunities as they materialize. In the short-term, an important catalyst for U.S. stocks will likely be the earning seasons, starting in earnest in the second half of October, which should provide more opportunities for well-run, outperforming companies to differentiate themselves from the index.

The views and statements contained herein are those of Sturdza Private Banking Group in their capacity as Investment Advisers to the Fund as of 15/10/15 and are based on internal research and modelling.