In November, despite market turbulences, we have successfully protected returns:
- • Sigma Fund Real Return reports MTD returns of +0.57% (+12.85% YTD)
- • Sigma Fund Prudent Growth reports MTD returns of +1.91% (+22.98% YTD)
- • Sigma Fund Quality Stocks reports MTD returns of +1.02% (+28.35% YTD)
Indices performance was uneven: MSCI World ends down -0.33% in EUR (+24.62% YTD in EUR), Nasdaq 100 is up +1.80%, S&P 500 falls -0.83%, and Eurostoxx 50 also falls -4.42%. Better Growth than Value.
The two factors that have lagged markets over the month, which had started on a positive note, were the FED and Omicron. The new Covid variant was first detected in Botswana on November 11th; on the 14th South Africa informed the WHO of the existence of this new variant. On December 1st, the first case was confirmed in the USA. Cyclical and value style shares corrected on the appearance of Omicron and the correction has continued until month end.
On November 22, it was announced that Jerome Powell would continue to head the FED. It seemed to be good news for markets, since Powell was the president of the FED in the 2018 crisis, when it overshot its rate increase forecasts and had to rev back when markets plunged as a consequence.
It was assumed that experience would outweigh all other factors and that the FED would not make the same mistake again, but Powell’s statements did not back this idea. Since the extension of his presidency was made public, he has taken every chance to sound the inflation alert and has announced that the FED will anticipate its tapering or withdrawal of monetary stimulus. Less cyclical, technology and growth style shares corrected on the back of these statements.
What is the most likely scenario for 2022?
Will it be one of orderly global recovery and cycle continuation? Or will we live an induced crisis, triggered by the FED’s tapering? In our opinion, the most likely scenario is a combination of both: a Disorderly global recovery, such as the one we’ve been experiencing since mid-2020. Disorder will be embodied in sector and country recovering at widely differing speeds, and in less coordinated actions by central banks. In fact, it seems that the FED and the ECB are already following separate courses.
While recovery continues, with growing consumer spending, corporates enjoy exemplary health, have surpassed all expectations, and continue to offer positive forecasts for next year. With consumer and public spending and investments on the rise, we see no reason to believe there will be a growth crisis in the short term. Even despite the restrictions that are checking international distribution channels and logistics, exports continue to increase. We are in the midst of a very positive cycle from an economic perspective.
Notwithstanding, we do expect there will be corrections and shocks down the road. The greatest risk for markets nowadays is not a Covid variant, nor the energy crisis that once in a while floods headlines: the greatest risk for growth are the central banks. The FED, BCE and BoJ have ample experience strewing cash into the economy, but hardly any (at least, successfully) at cooling down growth to contain a monetary bubble as large as the current one.
If there is a fact that is well known about the FED it is that alike analysts, it is uncapable of making accurate forecasts. Forecasts are made because markets demand them, they need to be reassured, just as motors need oil to function correctly. Markets ask that the future is spelt out for them, and the FED puts on its wizarding apparel and casts the cards as requested, but it has no idea of what the future lays in store. The FED has been averring that inflation is only transitory for several months now. Overnight, it barefacedly declared that inflation is no longer transitory, and no one dreamed to doubt its forecast. After all, it is the best informed agency in the world. But the truth is that the FED does not make forecasts, it only reacts to reality as they see it; and this is all they can do. They are politicians and we can’t ask them to do more. They should let the economy grow on its own and allow companies to find their own path to recovery, without throwing stones in their way.
So, what can we expect?
Specifically, a detailed tapering calendar will be released by the FED on December 15th, and they will promise to try not to trigger a new crisis. While, as a reaction, volatility may increase or not the now recognized inflation makes investing a must, so appetite for markets should not disappear. The yield curve indicates that markets do not anticipate a recession in the short-term, nor high inflation rates in the long term. This means that markets haven’t believed Powell for now and that inflation is indeed temporary. This impasse has generated heightened tension in the derivative markets, unseen since February this year. Global managers have continued buying equities, but they have also purchased protection.
What have we done?
Facing a disorderly global recovery:
- • In equity, we continue to bet for growth sectors through high quality companies. We slightly increased the weighting of cyclical shares with positive growth data, backed by low leverage and solid fundamentals. We continue to hold positions in high growth equity taking advantage of the excellent opportunity opened up by the correction they have suffered, which had no basis except the announcement of the withdrawal of stimulus that will in no way affect their business plans.
- • In hedges, we increased our short exposure to Nasdaq, and leave the Eurostoxx and S&P hedges unchanged. Actively managing options strategies to take advantage of volatility peaks and valleys.
- • In currencies, very long USD. It is called to benefit from tapering, future rate hikes in the USA, and it is still the currency that most confidence creates in the world. In addition, for an EUR investor to buy USD generates positive returns from exchange differences. Few arguments against the USD.
Long term course should remain unchanged
In the long term, strategy should prevail. Tactics help win small battles such as November’s, but in the long run objectives and strategies continue to be the same. We must achieve above average asset growth for our investors and the only way to do so is by being invested in companies with exceptional growth rates, which are trendsetting leaders in innovation crashing all barriers and limits, to improve people’s lives. Such companies earn more for their shareholders and employees, and to global growth. Growth and Momentum are still the two pillars that offer most security to portfolios in the long term.
