September 2015 – Market and Macro update

BY ERIC VANRAES

Monthly Fund Commentary
4 Sep 2015

BY ERIC VANRAES

After a series of volatile days in the markets (stocks, bonds, forex…) EI Sturdza would like to share their views and convictions, which remain unchanged.

Over the past few weeks, an accumulation of factors (market valuation, macro economy, technical analysis, currency levels) led us to consider that this kind of correction in the stock markets was possible and should be considered as a buying opportunity in developed markets. This correction started on Monday 24thAugust in Asia, provoked by exaggerated fears of a collapse of the Chinese economy, just one week after the shock provoked by the devaluation of the Yuan by the Chinese Central bank (PBoC). We immediately believed that the huge drop in the markets was not the beginning of a turning point and that a major correction was, and still is, unlikely because Central banks (Fed, ECB, BoJ and PBoC) are more than ever ready to extinguish the fire if needed. The Chinese Central bank’s easing on Tuesday 25th and the stabilisation of the Renminbi around 6.41 supported the market.

Nothing has really changed from a macroeconomic perspective during the past weeks. Chinese growth is weak, the US economy is subdued and Europe is still fighting against zero growth & inflation despite the “alignment of planets” (low euro, oil prices, yields and ECB’s QE). Commodity prices should remain low and oil prices could decrease below $40 a barrel. In addition, Ms Yellen’s comments and the publication of the FOMC minutes on 19th August showed that the Fed monetary policy will remain highly accommodative for quite some time, the timing of the “lift-off” being less important than the subsequent pace of increases which would be gradual. More generally, the behaviour of Central banks in the US, Europe and Asia will remain market friendly.

We pay significant attention to the behaviour of the bond and forex markets as they are driven by the current currency and yield wars. China and some Emerging Market Central banks were very active during the stock market turbulence, selling huge amounts of US Treasuries, leading to higher volatility in the bond market and a smaller than expected rally in safe haven assets such as AAA government bonds. We also noted that the euro has been bought back as carry trades are being unwound. At the same time, the euro and the yen were rallying as hard as major equity indices were falling.

The turbulence experienced on Monday 24th should not be forgotten. First and foremost, volatility (vix) increased sharply an important signal. Secondly, some levels reached by markets in the afternoon could be seen as negative by technical analysis specialists and could become a catalyst for the next correction. Finally, our conviction is reinforced that the market which could suffer the most from this correction is definitely High-Yield and low-quality corporate spreads. Poor liquidity and huge spread widening are worrying issues and we still avoid any investment in this market.

To summarize the present situation, volatility is higher, corrections are possible but we are still confident that such turbulences should be seen as an opportunity to invest because Central banks cannot afford a further crash. They will do “whatever it takes” as Mr. Draghi says. More importantly, these real, not virtual stress tests show, once again, the talent of our Investment Advisers and their ability to outperform the indices as their investment processes and management styles are proven to be solid in such a difficult environment. Both equity and fixed-income ranges have a bias towards quality assets, which offer meaningful protection against significant losses. We are also convinced that our offering, with a range of award winning equity funds combined with high quality bond funds, is ideally suited to the current macroeconomic and financial market environments.

The views and statements contained herein are those of Banque Eric Sturdza in their capacity as an appointed Investment Adviser to the EI Sturdza Funds plc as of 02/09/15.