In this mid-year publication, we review our January expectations and analyse some current key economicindicators before outlining the asset allocation that we recommend for the second half of the year.
Our portfolio positioning at the beginning of 2018 was somewhat cautious, with an above-average level of cash and a modest overweight exposure to the equity asset class. We contended that 2018 would be a more challenging year for equities and this has greatly proven to be the case. Our expectation that bond yields would gradually rise has been vindicated in the case of U.S.Treasuries, but not for core European bonds.
We refrained from deploying any cash towards equities during the spectacular January rally as we felt that markets had become overbought and investors too bullish. With traditional assets struggling to produce positive returns in the current unstable market conditions,the role of alternative strategies has taken on more importance, as a source of uncorrelated performance and to strengthen the resilience of portfolios.
Geneva, 20 June 2018. Geneva-based wealth management company The Forum Finance Group has announced the appointment of Jean-François Andrade as a partner. He joins Etienne Gounod, Philippe Kern, Egon Vorfeld and Hippolyte de Weck after Hervé Chanut's retirement as equity partner, but who remains Chairman of the Board of Directors. Jean-François Andrade joined Forum Finance in 2013 from Pictet & Cie.
Jean-François Andrade began his career in 1999 with Banque Privée Edmond de Rothschild as junior portfolio manager and assistant to the CFO. After several positions in wealth management at various financial institutions, he joined Julius Baer in 2004 as asset manager, then Pictet Wealth Management in 2008, where he worked for 5 years in the Latin America team. In 2013, he left Pictet & Cie for The Forum Finance Group with Philippe Kern and Lucia Bruel.
Jean-François Andrade holds a Master HEC from the University of Geneva.
"We are delighted to welcome Jean-François Andrade to the partnership. This decision is in line with the policy we defined a long time ago. Indeed, some 22 years ago, we put in place solid governance, with several generations of partners who ensure a smooth handover. We are thus offering a genuine long-term entrepreneurial project to attract talented managers who wish to join a human-sized project with which they can identify," said Etienne Gounod, Managing Partner and CEO of Forum Finance.
Founded in 1994 in Geneva, Forum Finance employs around 20 people who manage and supervise approximately CHF 1.5 billion in assets. In April 2018, Forum Finance announced its diversification into asset management with the launch of a strong conviction global equity fund. Under an LPCC license, the company is regulated and supervised by FINMA and is registered with the SEC.
May was eventful as an early-month rally of equity markets was derailed by a flare-up of political and geopolitical risks, with Italy being in the eye of the storm. Safe haven assets, including U.S. Treasuries, Bunds, the Swiss franc and the yen, rallied whereas the ongoing appreciation of the dollar accelerated. Emerging markets’ assets remained under pressure due to a mix of rising Treasury yields, a stronger dollar as well as idiosyncratic issues in countries such as Turkey and Argentina. Global financial markets were also impacted by geopolitical headlines related to the tensions over trade between the United States and China, the U.S. pull-out from the Iran nuclear deal and the holding or not of the U.S./North Korea summit.
A number of trend reversals were observed during April as European equities outperformed and as the dollar started to rebound; G-7 sovereign debt also returned to its early-year trend of rising yields, with U.S. Treasuries recording the steepest moves. When looking at year-to-date returns of regional equity indices, European equities have more than made up their underperformance relative to U.S. and emerging markets. Part of this catch-up can be explained by the rebound of the dollar, which appreciated by 2% against the euro during April. Japanese equities also performed well during the month as the Topix Index gained 3.6%, helped by the 2.8% depreciation of the yen vs. the dollar.
The Forum Finance Group is launching a new high conviction global equity strategy. The implementation of the investment strategy has been entrusted to Charles-Henri de Marignac, who joined Forum Finance in 2017 to develop it. The strategy is structured in the form of a Luxembourg Reserved Alternative Investment Fund (or RAIF), which is not registered for distribution in Switzerland and is only available to qualified investors.
March was another tumultuous month for equity markets, which have moved from an early-year state of euphoria to a state of confusion. With a lack of news related to the profitability of companies, stocks have been hurt by concerns about a trade war, reshuffles within the White House and a series of negative developments relative to the technology sector. Maybe surprisingly, defensive assets have not benefited that much from the volatility of stock markets; gold was virtually unchanged, government bond yields have drifted only a little lower while the Swiss franc and the yen, the perennial safe haven currencies, barely varied over the month.
Financial markets were shaken out of their comfort zone in early February as global equity markets were severely impacted by a sudden spike of volatility and by fast-rising bond yields. Even if these factors were the main reasons for the turbulence of the markets, it is fair to affirm that equity markets were ripe for a correction as they had become extremely overbought and had been boosted by massive inflows during January.
Global equity markets got off to a spectacular start in 2018 as investors poured into equity funds at a record pace. In contrast, government bond markets have remained under pressure with yield curves gradually shifting higher and also steepening. The end-2017 weakness of the U.S. dollar against most currencies accelerated throughout January, reflected by a monthly drop of 3.3% for the dollar index.
2017 was a good year for the global economy and an outstanding one for equity markets
The global economy enjoyed its strongest rate of growth since 2011 with the most noteworthy aspect being that growth was broad-based and expectations were upgraded during the year. Geopolitical tensions, at times quite threatening, failed to dampen high levels of business and consumer confidence and had only a short-lived impact on capital markets. Concerns about European political events did not materialize as populist parties failed to create an upset in several general elections. Also, Emmanuel Macron’s spectacular rise to power in France was considered to be a major boost for the future stability of the European Union.
Equity markets had an unusually smooth ride throughout 2017 with strong and widespread corporate profitability and ample liquidity underpinning higher equity prices; volatility was consistently close to record lows and no major shocks were observed. Bond markets could be described as having been a little choppier but remained within relatively tight ranges. Surprisingly, the euro turned out to be the strongest major currency, on the back of a much more stable political landscape than expected in Europe.
November turned out to be quite eventful, especially when compared to the relatively quiet previous months. The performances of equity markets across the world were far from being homogeneous; US equities hit new records, emerging markets ended flat and European equities lost ground, due to the impact of an appreciating euro. Short-lived stress was observed in both the US and European high-yield bond markets whereas Chinese assets were affected by authorities’ efforts to limit levels of debt. Finally, the high-flying technology sector was impacted by a late-month sell-off. Profit-taking and a switch into sectors seen benefiting the most from the potential reduction in the US corporate tax rate were behind this correction of tech stocks..
October was another strong month for global equity markets as the MSCI World Index gained 2.5% in local currencies. The ongoing rally was primarily sustained by positive economic data, robust third quarter corporate earnings and a dovish European Central Bank. Rising expectations for US tax cuts and a general election victory by Japan PM Abe also contributed to the supportive environment for risk assets. The US dollar extended its September rebound and appreciated versus all the other major currencies. Bond yields edged lower in the Eurozone while the yield on 10-year Treasuries ended the month only four basis points higher than at the end of September.
The trends observed during September were not necessarily those anticipated by many seasoned market investors and commentators. A rise of volatility and a correction of equity markets had often been put forward but the end result was a good performance of equity markets and volatility close to record lows. Bond yields trended higher while the US dollar finally managed to regain some composure as it rebounded against most currencies. Within the equity asset class, European equities clearly outperformed, for the first time since April. Emerging market equities were impacted by some profit-taking and the recovery of the dollar. The dollar was also a headwind for gold as were the rising real interest rates.
Global equities managed to end August virtually unchanged even though it was quite a volatile month for financial markets. Sovereign debt performed well as key central bankers refrained from discussing any changes to their monetary policies whereas gold benefited from safe haven demand and lower real interest rates. The euro reached new year-highs against other major currencies and peaked close to a parity of 1.21 versus the dollar before retreating somewhat. Finally, oil prices dropped as severe flooding in Texas restricted refining capacity, resulting in lower demand for crude oil.
The euro was the star performer during a month of July which also saw global equity markets record additional gains. Developed sovereign debt markets regained their composure following the late-June/early-July correction while the US dollar continued to depreciate against most of its peers. The equities of emerging markets outperformed once again as they recorded a 4.4% gain in local currency terms. In contrast, the appreciation of the euro prevented equities of the Eurozone from making any significant gains.
In this mid-year publication, we review our January expectations and analyse some current key economic indicators before outlining the asset allocation that we recommend for the second half of the year.
We had increased our equity allocation at the beginning of the year
On the back of our positive macro-economic and equity outlook for 2017, we positioned the portfolios dynamically by increasing the allocation towards the equity asset class. We had also expressed our confidence that equity prices should be supported by an acceleration of global earnings’ growth and, so far, this has effectively proven to be the case.
We had reaffirmed our strong conviction on emerging markets and our early-year global equity exposure was well diversified into the different regions. We have since increased our allocations towards European and also emerging markets equities. Hedge funds were an area of concern following a disappointing 2016 performance, but the different funds to which we are exposed have performed much better so far this year and contributed to the strong performance of portfolios.