Monthly management comment
Macro & Politics: Investors sentiment boosted by the Fed and corporate earnings
As expected, central banks delivered the well needed monetary medicine. Despite a less dovish tone, the Fed cut rates once again and still seems to be behind the yield curve. We foresee further US cuts, perhaps even reaching 0 as now mundane in Japan and Europe. The rate differential between USD and EUR or JPY has decreased substantially, and a weakening currency is probably great news for president Trump. Skies seem also to clear on the Brexit front (BoJo should win the elections in December and sign the negotiated agreement with the EU) and in international trade (the much-awaited US/China truce could materialize in the coming weeks as Trump seems eager to reach phase one). Recent stats such as recent payroll figures have also helped in pushing aside recession fears that weighed on the equity markets just a few weeks ago. This environment combined with solid quarterly earnings are reviving hopes of a continued Goldilocks scenario with a possible economic rebound stimulated by low interest rates.
Technical breakout: time for a Christmas rally?
We started October with a cautious bias and were caught a bit of guard by the strong performances. Many indices have made technical breakouts, a positive sign for equities. Historically, it makes sense to buy the new highs as previous resistances become supports. We have therefore changed our stance and will allocate some cash as we feel the tide should last until Christmas. We started by selling Baba and Her- mes (we feared Hong Kong riots would have a significant impact) and the emerging bond Fund Templeton Total Global Return (very poor relative performance). We also ended our position in the Corestate Capital Holding Bond after a sudden and unexplained drop. We bought a 1.625 Suez Bond and started a position in ABB just before its earnings report (these earnings were quite encouraging and we feel it could be the start of a good turnaround story).
We are collecting strong returns on some cyclicals (Stora up +12.8% MTD (as at 04.11.19) and +23.5% YTD, Boliden up +19.7% MTD and +41.1% YTD) and special stories (Elekta up +7.2% MTD and +32% YTD / Hexagon up +10.4% MTD and +28.4% YTD). We probably will need to find alternatives into different sectors as this “niche” seems to get pricey. Some stocks we are following include: Essity (Producer of special tissues, non-cyclical defensive with strong track record), BAE systems (European defense spending can only increase), Shimano (good proxy for current bicycle boom) and H&M (impressive turnaround).