Yoann Ignatiew
General Partner, Head of International Equity and Diversified
It has been a year since the pandemic led to a global and unpredictable collapse in economic activity, but the situation appears to now be normalizing. The Stakhanovism approach of central banks, which pushed governments to be widely involved in supporting their economies, seems to have paid off.
Violent collapse of stock markets was quickly followed by a spectacular bounce back. At the end of March, the S&P 500 was +75%1 higher than its trough in 2020, beyond its all-time high. Europe posted a more modest jump of about 65%1 as France’s CAC 40 exceeded its last peak reached in 2007. The sector rotation caused by the “Pfizer day” holds ground as investors continue favouring cyclical stocks2 at the expense of those that remained resilient at the height of the crisis
The “normalization” is however gradual and uneven. China was first hit by the pandemic and is already starting to tighten its monetary policy, while the United States and European economies still appear to be heavily dependent on monetary and fiscal support. In Europe, Christine Lagarde announced the ramp-up of asset purchases in the coming quarter to avoid tighter financing conditions. Many are calling for more decisive action by both the ECB and the European governments. In the United States, several plans are being rolled out: the “Relief Package”, the “Rescue Plan”, the “Build Back Better Plan” and questions around how these are to be funded are starting to arise. The money poured into the US economy is not only expected to support the country’s growth, but also benefit its trade partners. The anticipation of a quicker than expected economic recovery led to a stunning rise in US sovereign rates, taking the 10-year US rate to 1.74%1, before falling back to around 1.62% at the end of April.
The global vaccination campaign is underway, although at a bumpy pace considering its dependency on the distribution capacity of laboratories and the authorisations of qualified agencies. While Israel is leading the way and has already vaccinated 62%3 of its population with at least one dose, the European Union appears to be behind schedule with a partial vaccination rate of only 24%3. The next challenge lies in vaccinating populations in the poorest countries, which suffer from an incredibly inequitable delivery of doses to date. Africa only accounts for 1.64% of the doses administered, while the continent represents approximately 17% of the world’s population3.
[1] Source : Bloomberg, 30/04/2021.
[2] Cyclical stocks are highly correlated to economic cycles. They therefore benefit strongly from periods of recovery and expansion but are also the first affected by an economic downturn
[3] Source : https://ourworldindata.org, April 2021.
R-co Valor
R-co Valor ended April with a net equity exposure of 83.7%. The sector rotation that began in November after “Pfizer Day” held its ground during the first months of the year as the sectors that suffered the most at the height of the crisis were favored by investors at the start of the year. The reinforcements on cyclical stocks made last year significantly contributed to the fund’s performance in the first months of 2021. The financial sector stood out, benefiting from the steepening of the yield curve4. Commodities and “energy” stocks in particular also stood out, benefiting from a significant rebound in investor demand. Nevertheless, the technology sector also emerged as a significant contributor to performance over the quarter. Some of the GAFAM5 have remained attractive, unlike unprofitable stocks in the sector. Chinese stocks such as VipShop or Tencent have also performed particularly well, despite tighter regulations. Profits were taken in the first quarter on the theme, via partial or total sales. Following the strong bounce back of cyclical stocks, we also trimmed some positions in the commodities sector to lock some profits. We took advantage of this sector rotation to make tactical reinforcements in stocks with more defensive profiles in the healthcare and gold mining sectors. Certain Chinese securities that were impacted after coming higher scrutiny by the authorities were also reinforced. What can we expect for the rest of the year? We are keeping our exposure to cyclical stocks, while opportunistically trimming certain positions when deemed appropriate. As long as central banks maintain accommodative policies and some slack remains in the labour market normalized yet, we believe that holding some exposure to these stocks remains appropriate. We are confident that the global economy will gradually recover but that some of the good news is already priced in by the market.
The threat of widely higher than anticipated inflation could force central banks to tighten policies sooner than expected and spark jitters. In addition, anxiety around tax hikes to fund the US’ stimulus plans could materialise and reduce risk appetite from investors. With this in mind, we purchased put6 options on the S&P 500 to hedge part of the portfolio from a significant market correction.
[4] Chart of bond yields according to their various maturities. In a stable economic environment, free from inflationary pressure and excessive debt, interest rates rise with the maturity of bonds
[5] Google, Apple, Facebook, Amazon, Microsoft.
[6] Option to sell an underlying asset, at an agreed date and price.
R-co Valor: Portfolio’s geographical and thematic breakdown
Source: Rothschild & Co Asset Management Europe, 30/04/2021.
The features of the portfolio are not fixed and may vary over time within the limits provided in the fund prospectus.
R-co Valor Balanced
Portfolio Allocation
During the first quarter, the fund’s equity exposure remained stable at around 44%. The fixed income portfolio was increased from 44% to 49% between the end of December and the end of April.
R-co Valor Balanced: Breakdown by asset classes
Source: Rothschild & Co Asset Management Europe, 30/04/2021.
Equity component
The equity portfolio of R-co Valor Balanced replicates that of R-co Valor. The movements executed, as well as the positioning, are identical.
R-co Valor Balanced: Geographical and thematic breakdown of the Equity pocket
Source: Rothschild & Co Asset Management Europe, 30/04/2021.
Fixed income component
The consequent rise in the 10-year US rate turned out to be the highlight of 2021’s first quarter. The sovereign rate reached its highest level since the start of the pandemic at 1.74%1 before falling back to around 1.62% at the end of April amid expectations of the economic recovery. The movement that began at the end of 2020 has been confirmed, driven by the approval of the USD 1.9 trillion stimulus package and by improved employment figures. Members of the Fed remain cautious but not overly worried about the rise of long-term rates. The more worrying health situation in Europe prompted the ECB to step up its purchases, leading spreads2 to tighten in peripheral countries.
In Europe, the primary market was particularly active at the very beginning of the year EUR 23 billion were issued on financials and corporates, making it the largest “opening week” of the last decade. A particularly strong momentum in the High Yield3 market should be highlighted as the issuance volume was double that of 2020 at the end of March. However, investor enthusiasm for the primary market faltered at the end of the quarter as low to non-existent premiums sometimes discouraged buyers, who prefer to cancel orders upon final price announcement.
In the fund’s fixed income bucket, the High Yield exposure fell slightly over the quarter, from nearly 15% at the end of December to 13,8% at the end of March. Cyclical stocks or “Covid linked” sales were made to lock-in profits. Capital was reallocated especially in the primary market, in mainly Investment Grade4 12 securities with a resilient profile. Purchases were made in the real estate sector, which has been particularly active in the primary market in the last few months, as well as banks. Successive regulations have stabilised the fundamentals of the sector, increasing the resiliency of banks and thus offering investors an attractive risk-return ratio. In addition, a partial hedge has been implemented on the High Yield exposure.
[1] Source: Bloomberg, 30/04/2021.
[2] The spread refers to the difference in yield between a bond and a loan considered as “risk free”, of equivalent maturity
[3] High yield bonds are issued by companies or States with a high credit risk. Their credit rating is below BBB- on the Standard & Poor scale.
[4] Debt security issued by companies or States with a rating between AAA and BBB- on the Standard & Poor scale.
R-co Valor Balanced: Geographical and by rating breakdown of the fixed income pocket
Source: Rothschild & Co Asset Management Europe, 30/04/2021.
The features of the portfolio are not fixed and may vary over time within the limits provided in the fund prospectus.
