The Central Bank’s dovishness – where to next?

The Osaka G20 summit was eagerly anticipated by markets for its potential to provide further information on the state of the Chinese-US trade talks. With expectations rather low after last month’s tensions, markets were somewhat enamoured by signs of the leaders’ willingness to return to the table.

Monthly Fund Commentary
24 Jul 2019

The Osaka G20 summit was eagerly anticipated by markets for its potential to provide further information on the state of the Chinese-US trade talks. With expectations rather low after last month’s tensions, markets were somewhat enamoured by signs of the leaders’ willingness to return to the table.

Given the significant impact of trade tensions on supply chains, capex plans, and Chinese consumer confidence, the Fund maintains a rather defensive bias as it relates to these themes.

Against the backdrop of the earnings seasons starting in mid-July, the month was rather quiet on the corporate front. Allergan made headlines* as an acquisition target for Abbvie in exchange for cash and shares at close to a 50% premium, making Allergan the largest equity contributor of the Fund during the month, followed by IQVIA, Booking Holdings, Apple and SAP. On the other end, on-going noise around healthcare reforms and the associated debates among democrats added pressure on Centene, whilst cyclical concerns and the evolution of the interest rate curve led to more headwinds for Charles Schwab and E*Trade.

On the monetary policy front, the Federal Reserve stuck to the script, delivering further accommodative language markets were looking for. While rates were kept unchanged, the team believe that the chairman virtually guided towards a July rate cut and a more dovish stance going forward. With monetary policy arguably the major force for global markets as of late, much of the dispersion of asset class returns this month can be linked back to the central bankers, with gold being the poster child.

June was another strong month for equity markets, with major indices rebounding from their May correction, while rates generally continued their downward trend. The S&P 500 gained 6.9%, whilst the Stoxx600 increased 4.3%, and the US 10-year treasury yield declined to 2%**.

In light of these developments, the Investment Adviser continues to maintain a conservative portfolio positioning both in terms of overall allocation and specific company exposure. With little EPS growth in the U.S. market overall, the team believe that the recent performance of the equity indices has been largely based on valuation expansion, with a premium having continued to build in visibly secularly growing companies. Going forward, the Investment Adviser will continue to monitor this phenomenon and look for attractive opportunities in such conditions.

* Source: Abbvie: https://www.abbvie.com/abbvie-allergan.html. June 2019.
** Source: Bloomberg. July 2019.

The views and statements contained herein are those of the Eric Sturdza Group in their capacity as Investment Advisers to the Funds as of 10/07/2019 and are based on internal research and modelling.