Quarterly Strategy Q2 2024 – R-co Valor & R-co Valor Balanced

Global equity markets ended the second quarter in positive territory. On the back of the rally in China, emerging markets stood out, with the MSCI Emerging Markets gaining +4.8% and the MSCI World up by +2.9%¹. Some disparity emerged among Western indices, with the S&P 500, driven by tech stocks, gained +4.7%, while the EuroStoxx 50 declined by -3.7%¹.

R-co Valor

 R-co Valor gained +0.5% on the period, raising its year-to-date performance to +8%². The portfolio's exposure to Eurozone equities drove down its performance in the past three months. The ECB was able to lower its interest rates in early June, due to sluggish economic momentum and a slower pace of inflation. This decision had already been priced in, but as services inflation was more persistent than expected, Christine Lagarde stressed that any normalisation of monetary policy would remain closely data-dependent. Despite this key rate cut, government bond yields rose and the equity markets fell on fallout from European parliamentary elections and the announcement of snap elections in France. Our exposures to China and North America contributed nicely to the portfolio's performance. In China, first of all, official measures to support the economy boosted the equity markets during the second quarter, allowing the Hang Seng to close the quarter up by +8.2%¹. The government announced new measures to support the real-estate sector – the first national property buying programme since the crisis began in 2021. This plan included lowering the minimum down-payment for a first-time purchase to 15% and a 39 billion euro programme,³ allowing state entities to buy up vacant properties. In North America, there were two main contributors to performance: mining companies and tech stocks. Tech stocks were driven by investor enthusiasm for companies reporting solid results and guidance, such as Alphabet. Mining stocks, driven by both copper and gold, were the top contributors in the second quarter.  

 Within R-co Valor, we have kept the equity exposure relatively unchanged so far this year, at about 68%². Even so, we made some transactions particularly for the purpose of reducing the portfolio’s most cyclical exposure and adding to its most defensive companies. For example, we completely sold off our position in Teck Resources, a diversified mining company, and took some profits on Ivanhoe Mines. Meanwhile, we increased our healthcare exposure through companies like AstraZeneca and Medtronic. In Asia, we took some profits on the online travel agency Trip.com, which is up by +30% year-to-date¹. We diversified our exposure to consumer stocks in emerging markets by investing in Grab, a Singapore company operating in the Asia-Pacific region and specialising in passenger transport and meal delivery. Finally, we reinforced certain stocks on weakness across several sectors; in South America with MercadoLibre and Stone, and in Europe with Alstom and Airbus².

 We hold five French stocks, accounting for a total of 8.5% of the fund², namely Air Liquide, Alstom, Airbus, Capgemini and LVMH. We have no exposure to the most pressured sectors, such as banks, utilities and telecommunications. Moreover, France represents a small share of these companies' revenues (around 10%). We are nevertheless adopting a cautious approach for the moment and will consider reinforcing certain positions on a case-by-case basis if significant corrections offer interesting opportunities, similar to the move we made on Airbus recently.

In the United States, the high expectations for earnings growth, reflect investors' confidence in companies' ability to deliver in the coming months. Given the concentration of flows in certain AI-themed stocks, a more muted outlook from these companies could create significant market stress. However, share buybacks for S&P 500 companies should provide solid market support, with 2024 expected to be particularly dynamic and forecasts close to 1000 billion dollars⁴.

 We remain confident in our exposure to Chinese consumption, although it is still struggling to recover. The Chinese Communist Party appears more committed than ever to supporting the economy, and we are positioned in such a way as to tap ingo a resurgence of consumer spending. China, has the additional advantage of being disconnected from the inflationary environment of Western countries, and the Chinese central bank possesses greater leeway.  

In the current environment, we have no intention to take on additional risk and remain at historically low equity allocation levels. The concentration of flows in certain areas/sectors, geopolitical and electoral tensions, and rising governmental debt all push us towards relative caution. In this context, we continue to seek out stocks with "atypical" profiles. This includes overlooked stocks, such as those in the healthcare or gold mining sectors. We are also exploring opportunities in China, where the economic recovery still seems hampered by the gloomy confidence of households and businesses despite government support measures. Finally, we focus on specific themes that we believe have long-term potential, such as copper mining projects in South America. Our money-market & similar exposure, at 32% of the fund, should not be regarded as a default option. French treasury bonds maturing in less than one year are now yielding about 3.6%¹ after a decate in negative territory, and our fund is flexible enough for us to take on exposure to this asset class, pending opportunities for a return to equities.

R-co Valor Balanced

 As of the end of June, R-co Valor Balanced shows an equity exposure of 37% with the bond segment representing 54%, and the remainder in cash and equivalents. The fund increased by +0.5% over the quarter, bringing its year-to-date performance to +5%².

Equity Pocket

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 Pocket 

 As the ECB announced its first rate cut at the beginning of June, volatility persisted in Europe against a backdrop of political risk aversion following the dissolution of the French National Assembly. Ten-year bond yields rose by 20 basis points (bps) on the quarter in Germany and the US, to 2.5% and 4.4% respectively, at quarter end¹. Following the announcement of the dissolution, the spread between 10-year French and German sovereign yields (a measure of the premium demanded by investors for the additional risk of holding French bonds) hit 85 bps, its highest level since 2012¹. This spread narrowed after the first round of legislative elections, as the prospect of an extreme scenario receded. In the US, declining inflation and early signs of economic slowdown suggested to investors the possibility of the Fed's first rate cut in September.

 The second quarter was active in the euro primary market, with issuers taking advantage of favorable conditions to refinance their debt, while investors showed strong appetite, confirming the presence of significant dry powder. The quarterly performance of euro corporate bonds remained positive. Investment grade⁵, which is more closely correlated to sovereign yields, was up by +0.07%, vs. 1.35% for high yield⁶.

In this context, within the portfolio, we continue to favor companies with low debt and the ability to maintain high cash flows. We remain cautious about the lower-rated corporate segment. Additionally, we have gradually increased the portfolio's sensitivity by buying 10-year German bonds, as well as 5-year futures⁷ for about 20% of our fixed-income allocation². And, lastly, we maintained our hedge via CDS⁸ on the Main iTraxx, covering about 20% of our fixed-income portfolio². These instruments, designed to protect us against systemic risk, proved to be especially useful late in the quarter. Within the portfolio’s equity allocation, we made the same changes as in R-co Valor (detailed above).