‘Tis the season to be watchful

BY ERIC I. STURDZA

Monthly Fund Commentary
19 Jan 2016

BY ERIC I. STURDZA

The month of December staged a number of important developments for global markets, not least of which was the first Fed Funds rate increase in nine years. With weakness in parts of the U.S. economy, seemingly deteriorating geopolitics and global growth prospects, and perceptions of an inflection in Central Bankers’ attitudes, sentiment ended less cheerful than the season would have suggested.

December marked the first decisive step taken by the Federal Reserve towards so-called “interest rate normalization”. While the hike was firmly priced into the treasuries market, remaining technical concerns around liquidity and ability to affect policy (especially the cap on the Reverse-Repurchase Facility) were seemingly overcome. The Federal Reserve Open Market Committee’s (FOMC) projections continued to imply, at the median, four further such increases in 2016, and focused on the importance of inflation while conveying confidence in the fundamental state of the labor market and economy. Needless to say, the fixed-income markets continue to disagree with this assessment, pricing in a far slower normalization process. 

The Federal Reserve wasn’t alone in its move to a marginally less dovish stance. Both the European Central Bank and the Bank of Japan, expected to significantly up the ante in terms of accommodation, came-in slightly more measured, and particularly in the case of Mr Draghi, inflicting significant levels of volatility in the currency markets. Further devaluation of the Renminbi, coupled with more evidence of weakness in Chinese economic activity, added fuel for global growth pessimism. While historically considered growth friendly, further unconstrained oil production by OPEC, as was reiterated at their semi-annual meeting, did not this time enthuse the financial world, as behind this increasing consumer surplus lies a more fractious and unstable geopolitical reality, further deflationary expectations formation, and mounting financial difficulties for energy companies worldwide. The liquidation of some high yield funds in the US certainly refocused investors on these difficulties, and on the conspicuous absence of a consumption boom to balance it out.

In the U.S., the Federal Reserve’s decision came at somewhat of an awkward timing for investors, as a number of economic indicators, apart from employment, came in softer than expected. Apart from the slight negative revision to GDP mostly related to inventories, durable good orders continued to show weakness, as did some preliminary holiday sales estimates. The ISM manufacturing index pointed towards a decline, industrial production did diminish and while the ISM Services remained in expansionary territory, the extent of that implied growth came down. Housing indicators remained relatively on trend, with positive new construction data but soft existing home sales. All in all, while there were no disasters, the strength of the U.S. economic momentum continued to be underwhelming.

US equity markets remained nervous, with analysts’ growth expectations continuing to be ratcheted down at a record pace. The Fund redeployed a portion of the cash held at the end of the previous month in new opportunities, while still holding a below-average net exposure in order to best navigate the ongoing challenging environment. Looking ahead, the Fund intends on seizing additional opportunities in proven growth companies as risk-aversion creates compelling entry points. Key information on the health of companies’ end-markets will become available as earnings season begins, at which point additional redeployments could well materialize. 

The views and statements contained herein are those of Sturdza Private Banking Group in their capacity as Investment Advisers to the Fund as of 16/01/16 and are based on internal research and modelling.