Expectations regarding ECB meeting keep market in suspense

After the very good performance posted in September, the European stock market overall continued its surge in October. The main catalyst was the ECB meeting held on October 26th, which paved the way to a short term acceleration, allowing the MSCI Europe Index to move close to its yearly highs posted in May.

Monthly Fund Commentary
27 Nov 2017

After the very good performance posted in September, the European stock market overall continued its surge in October. The main catalyst was the ECB meeting held on October 26th, which paved the way to a short term acceleration, allowing the MSCI Europe Index to move close to its yearly highs posted in May.

The first part of October was characterised by a lack of direction, with sideways and low volatility movements taking place. The market was waiting for the ECB meeting, expecting information on tapering actions and the implementation of policies to “return to normal”. The ECB Governor was clever in delivering a mixed message, with a very positive view on growth but at the same time with a cautious stance on inflation, which to date remains muted. As long as inflation is weak, any harsh message could destabilise markets and create undesired volatility. Overall, the Central Bank adopted a good approach, paving the way to exit from the extraordinary stimulus measures in a gradual way. Facing yearend, Draghi’s message was perfect in order to keep the market as calm as possible.

The MSCI Europe Index moved between 130.75 (monthly low on 25th October) and 133.54 (monthly high posted during the last trading hours of October), closing at 133.46. The European equity market closed the month posting a large gain, giving a strong response to the negative trend seen throughout the summer. The market is still positive year to date: the MSCI Europe Index shows a very good price return (+8.95%) at the end of October, almost reaching its yearly high posted in May (around 134 points) and having almost recovered from the summer drawdown. After a strong performance in September, the equity market proved to be resilient again in October.

At the end of the month, the Dollar rebounded, loosening the pressure on the Euro, with the latter reaching 1.16 against the Dollar. At the same time, the Dollar Index rebounded, approaching the 95 level. In October, the American stock market was much stronger than the European market and posted new historical highs in local currency. The relative strength of the S&P500 Index was large, with the market approaching 2,600. Overall, global markets outperformed European markets in October.

During the month, the Strategic Beta Flex fund returned 0.2%. There was a small intra month drawdown before the ECB meeting, however overall the Investment Adviser classifies the October movement as sideways, as the strategy remained stable. The Fund’s volatility is under control, since equity valuations are near their historical highs, both in absolute and in cyclical adjusted terms. This cautious approach still leads the Investment Adviser to partially hedge the long exposure, waiting for a clear opportunity to raise the net long exposure.

The team continues to observe a large premium between the reference equity market and its long term moving average, the gap however not yet being statistically excessive. After the steep September and October rally, the Investment Adviser prefers to adopt a mixed approach, partially protecting the equity assets.

From a statistical point of view November and December are good months for equity markets. In October, equity volatility typically tends to surge, however, this was not the case in 2017. The volatility spikes usually tend to be limited, when the market trends above its long term moving average.

The views and statements contained herein are those of Sofia SGR in their capacity as Investment Adviser to the Fund as of 10/11/2017 and are based on internal research and modelling.