Newsletter | April 2019

+ 12%: THE BEST QUARTER FOR THE MSCI WORLD LC INDEX SINCE Q3 2009

– 0.07% – THE YIELDS OF 10-YEAR BUNDS ARE BACK INTO NEGATIVE TERRITORY

Investment perspective

The first quarter has ended with a well above-average quarterly gain for global equity markets, a significant contraction of credit and EM debt spreads and a plunge of sovereign debt yields. It has also seen the main central banks turn increasingly dovish in the light of growth slowdown concerns and a lack of inflation pressures. Following a 13.5% correction during last year’s fourth quarter, the MSCI World Index in local currencies has made up most of its losses thanks to a 12% year-to-date rebound. Credit spreads have also fared well, with those of U.S. and European high yield bonds tightening by 1.35% and 1.09% respectively. These trends have been primarily driven by the unwinding of excessively pessimistic sentiment, the Federal Reserve’s change of tone and optimism over a sino-american trade deal.

The past month was marked by the steep drop of bond yields in a context of weak economic data and the announcement of even more accommodative monetary policies. PMI Manufacturing data continued to show widespreadweakness, in Europe in particular, with Germany’s number dropping to 44.1from 58.2 a year earlier; one must nevertheless point out that China’s latestmanufacturing data has started to show signs of improvement. At its last meeting, the Federal Reserve proved to be even more dovish than expected by the markets; the bank announced the end to its balance sheet reduction for 30 September and its members no longer anticipate any rate hikes this year. Furthermore, it downgraded its GDP growth outlook for 2019 from 2.3% to 2.1%. On its side, the European Central Bank had already spooked markets at the beginning of March due to its bleaker economic outlook and by the announcement of a number of measures to support the Eurozone’s economy. These more dovish stances triggered much lower bond yields, with those of 10-year Treasuries and Bunds dropping from end-February levels of 2.72% and 0.18% to 2.41% and – 0.07% respectively.

One of the most hotly debated issues in financial markets is the current shape of the U.S. yield curve. The chart above shows that it is now partially inversed, as some longer-term yields are lower than shorter-term ones. The inversion of the yield curve is seen as a forward indicator of an upcoming recession, even if there is no consensus over which terms’ spread is the most relevant. We can observe that neither the 10/2 years spread nor the 30Y/3months spread have inverted and conclude that it is still premature to get overly concerned.

Investment strategy

In March we decided to take additional profits on equities, meaning that our equity allocation has been cut this year from an initial overweight to now being slightly underweight. This decision was driven not only by the desire to protect some of the strong year-to-date portfolio performance but also by the feeling that markets might be getting carried away. A lot of positive news appears to be priced in at a time when global GDP growth is slowing and when uncertainty over corporate earnings is high. The markets also appear to be totally ignoring the risks related to a no-deal Brexit. We therefore prefer to err on the side of caution ahead of the reporting of first quarter earnings, which starts mid-April.

The first quarter has been quite exceptional in terms of performance as both equity and bond markets have rallied simultaneously. We do not believe that this situation will last and expect a decrease of the correlation between both asset classes going forward.

WE HAVE OPTED FOR MORE CAUTION IN THE PORTFOLIOS

Portfolio Activity/ News

In March, the portfolios added to their early-year gains, with both equities and bonds contributing positively. In contrast to the previous months, the overall contribution from hedge funds was also positive. This was mainly due to the strong return recorded by the trend-following strategy, which benefited from its high exposure to long-term rates, to credit and to equities. Other strong portfolio contributors includedemerging and frontier markets’ equities, as well as bondfunds, especially those with a long duration positioning. Our underweight exposure towards the U.S. dollar represented a modest opportunity cost for portfolios denominated in euros and pounds, due to the weakness of these currencies.

During the past month, we took profits on our U.S. Small Cap fund and also on a fund investing into Swiss equities. The reasons for these transactions include strong year-to-date performance, portfolio risk management and the view that markets might be getting a little frothy in view of economic uncertainty and excessive optimism over the impact of the sino-american trade deal.

 

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