Quarterly newsletter R-co Valor & R-co Valor Balanced — Q3 2023

The markets ended the third quarter in negative territory, down by 3.8%⁽¹⁾ regarding global equities (as measured by the MSCI World All Country index). The surge in interest rates, paired with central bankers’ hawkish language ultimately carried the day over the obstinate optimism that investors had maintained on the year to date. As a result, over the past three months, Europe has lost 5.1%⁽¹⁾ (Euro Stoxx 50), the United States by 3.7%⁽¹⁾ (S&P 500), China by 5.9%⁽¹⁾ (Hang Seng Index).

By sector, tech stocks, which drove the markets in the first half of the year, lost 4.1%⁽¹⁾ (Nasdaq 100) in the third quarter. Within the fund, our stock pick on the thematic paid off, with an overall performance of +3.9% during the review period⁽²⁾. The tech sector led the way, driven mainly by North and South American stocks in the portfolio, such as Alphabet (+9.3%)⁽³⁾, Uber (+6.5%)⁽³⁾ and Mercado Libre (+7%)⁽³⁾. We also sole into the rally by some shares to take some profits by selling down stocks such as Uber and Vipshop. The worst contributors – industrials, which are more cyclical – were hit by the gradual worsening in the macroeconomic environment, paired with stubbornly high inflation.

In China, at the meeting of the Politburo Standing Committee, the party’s decision-making body pledged to support the recovery in the economy, which it acknowledged was “tortuous”. Moralising rhetoric on the real estate sector was softened, mention was made of local governments’ debt burden, and the Politburo confirmed its determination to make Chinese households a strong driver of growth. A set of measures meant to restart the economy was announced, including an easing of terms for home purchases, lower mortgage lending and bank reserve rates, tax breaks for small businesses, support for the acquisition of electric vehicles, and so on. Retail sales on the month of August turned back up by 4.6% year-on-year, but the real-estate sector, which accounts for 30% of China’s GDP⁽⁴⁾, is a major obstacle to a significant recovery in its growth. Within the fund, we limited dilution to China by strengthening portfolio positions, such as Ping An, Kingdee and Tencent. We picked some stocks exposing us to Chinese consumption including the technology and also Leisure/ Travel. Chinese households’ savings rate is historically high (at about 2 000 billion dollars over the past 12 months) and even a limited deployment of these accumulated savings could offer significant support to a robust recovery.

R-co Valor was positioned rather conservatively as of the end of September, and we stuck to our risk-reduction strategy during the latest quarter: 1/ by lowering our equity allocation from 85% in November 2022 to 69%⁽⁵⁾, a 15-year low; 2/ then, along the lines of efforts made in recent months, we repositioned the fund towards stocks that are more defensive by selling down cyclicals such as financials and diversified mining companies and adding to the more defensive sectors of healthcare and goldmines. In addition to equities, we are maintaining a significant allocation (31%)⁽⁵⁾ in money-market products and cash. We continue to invest in French government bonds maturing in less than one year. The yield on offer is now approaching 4%⁽⁴⁾, and we believe that, in addition to being a good place to park cash, given the yield attached, these also features appreciable liquidity.

The slowdown in global economic growth, the shrinking of the equity risk premium, and the reduction in liquidity orchestrated by the central banks, on top of tougher access to credit, are all factors that are making us more cautious. Central banks appear to be more “datadependent” than ever and will steer their monetary policies along the lines of inflation figures. These figures are more resilient than expected and do not justify significant cuts in interest rates anytime soon. The US tech sector’s rather surprising outperformance in an especially hawkish rate environment suggests that the markets are nervous and are seeking safe havens outside of traditional defensive sectors.

Portfolio Allocation

As of end-September, R-co Valor Balanced’s equity exposure was 34.5% and its bond allocation, 58.4%, with the rest being in money-market and cash⁽⁶⁾.

Equity allocation

R-co Valor Balanced equity allocation replicates that of R-co Valor. Both funds have the same exposures and are subject to the same modifications.

Fixed income allocation

After a relative lull in the first part of the year, interest rates took off again on both sides of the Atlantic. 10-year US and German yields rose, respectively, by 74 basis points (bps) to 4.6% and by 45 bps to 2.8%⁽⁷⁾. The credit market was especially resilient despite uncertainty on interest rates. Within euro corporate bonds⁽⁸⁾, High Yield⁽⁹⁾ outperformed Investment Grade⁽¹⁰⁾ (which is more vulnerable to shifts in interest rates) with respective performances of +1.8% and +0.3%⁽¹¹⁾. September, which is historically busy on the primary market after the summer break, came in below expectations, with just 35 billion euros in issuance. This relative dearth is one reason for the secondary market’s strong showing.

The fund gained +0.22% on the quarter and is up by 6.4% on the year to date(7). The credit allocation offset the underperformance of the equity allocation and allowed the fund to end the quarter in positive territory. Within the bond allocation, in an environment of end-of-cycle monetary tightening and with the aim of increasing sensitivity while keeping risk levels moderate, we bought some 10-year Bunds. The sensitivity of the bond portfolio is now 4.5, close to the level of the index⁽⁷⁾. Meanwhile, in corporate bonds we continue to overweight Investment Grade and continue to use CDS⁽¹²⁾ to hedge about 5% of our High Yield exposure. We also gradually lowered our exposure to the lowest-rated bonds, to get the jump on the refinancing problems expected for 2024-2025. All in all, as of the end of the quarter, R-co Valor Balanced is positioned rather conservatively, with its equity exposure at an all-time low. We have chosen to lower our risk exposure through our asset allocation but also within each of them, favoring the less risky part of the bond exposure and overweighting equities with a more defensive profile.

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