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Investments were made gradually throughout the year in cyclical, European industrial and US financial stocks, which should be well positioned for an economic recovery. We also maintain our exposure to long-term growth stocks whose fundamentals have been strengthened by the current crisis. Cash and cash equivalents currently weigh 15%, providing some room to opportunistically invest and strengthen certain lines should markets pull back. Chinese consumers remains one of our strongest convictions. The Middle Empire seems to emerge as the “big winner” from this pandemic with positive growth forecasts for 2020 and a notable GDP rebound of over 8% in 2021(3). As far as the Sino- American trade war is concerned, we can expect a less aggressive approach by the new US president, even if initial measures shouldn’t be cancelled.
Update on R-co Valor
The fund started the year with an equity exposure at a 10-year low of 70%. Hedges on the S&P 500 were gradually lifted in Q1, to increase exposure significantly during the market downturn particularly in cyclical stocks that had experienced sharp corrections.
The uncertainties of the last few months seem to have been largely dismissed. The next US president has been announced and at least three vaccines are believed to be effective against the virus so far. Combined with resilient corporate results, this paradigm shift gives way to a continued rebound in equity markets in 2021. Beyond the indices’ performances, it is important to look at the behavior of underlying assets. Cyclical stocks, battered in 2020, seem to be particularly well positioned: industrial companies will benefit from both the economic recovery, and the various stimulus plans that may be enacted by governments. Travel-related businesses such as cruise-operating companies, accommodation, or airline companies, have already begun bouncing back in anticipation of the recovery in tourism. Financials, which have proved to be much healthier than in the last crisis, should benefit from the steeper yield curve(1) particularly in the United States.
Nevertheless, several factors could bring some short-term volatility in 2021. First of all, the various vaccines that are currently being manufactured will initially be distributed on a limited basis. In the United States, uncertainty at the Senate level remains. While the hypothesis of a Democratic president and a divided Congress seems appealing to investors (which would imply a limited tax hike accompanied by a stimulus package), the probability of a “blue wave”(2) is not nil. This could bring some uncertainty and drive investors to focus on sectors exposed to potential new regulations. A steepening of the yield curve is also something to keep an eye on, more specifically in the United States which have already experienced some adjustments in anticipation of a continued economic recovery and inflation.
Investments were made gradually throughout the year in cyclical, European industrial and US financial stocks, which should be well positioned for an economic recovery. We also maintain our exposure to long-term growth stocks whose fundamentals have been strengthened by the current crisis. Cash and cash equivalents currently weigh 15%, providing some room to opportunistically invest and strengthen certain lines should markets pull back. Chinese consumers remains one of our strongest convictions. The Middle Empire seems to emerge as the “big winner” from this pandemic with positive growth forecasts for 2020 and a notable GDP rebound of over 8% in 2021(3). As far as the Sino- American trade war is concerned, we can expect a less aggressive approach by the new US president, even if initial measures shouldn’t be cancelled. ■
(1) A phenomenon that occurs when creditors demand higher risk premiums for lending over long maturities.
(2) A situation in which the Democrats would win the White House and the Senate. (3) OECD, December 2020.
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Completed on 26 November 2020
