Strategy Update – R-co Valor

Macroeconomics & Markets

July proved to be a slightly positive month for equity markets overall, with the MSCI World All Countries index posting a performance of +0.59% over the month^[1]. There were significant differences between geographies; while the United States bounced back particularly well (+2.27% for the S&P 500 in dollars^[1]), Europe seemed preoccupied the development of the Delta variant (Euro Stoxx 50 +0.62% in euros^[1]). China, for its part, posted its worst month of the year (-9.94% for the Hang Seng in Hong Kong dollars^[1]), destabilised by a succession of government announcements regarding tighter regulations in certain sectors.

Central banks seem to be maintaining a relative status quo over the summer period. As for the Fed, its Chairman, Jerome Powell left key rates unchanged and kept asset purchase levels up at $120 billion per month. While he acknowledged that the US economy has made progress recently, it cannot yet be considered as “substantial”. Regarding the ECB, Christine Lagarde announced during the July conference that she would be maintaining her accommodative policy. However, a significant change was announced earlier this month regarding inflation: The ECB hiked its inflation target from “below but close to 2%” to a symmetric 2% target over the medium term.

Finally, the People’s Bank of China announced a cut in the reserve requirement ratio for banks to boost the economic recovery. From a microeconomic viewpoint, company results are good, above expectations, without being systematically reflected in the stock market performance of the shares (since they were already factored in). Higher forecasts, expected earnings growth (+72% year-on-year earnings per share in the US and +120% in Europe^[2])and the resumption of share buyback programs are driving publications, particularly for cyclical stocks^[3]. The development of the Delta variant and the ability of companies to maintain their margins in an inflationary environment are now seen as stumbling blocks by investors.

China has been under pressure in recent months with restrictions, fines and investigations, particularly in the sectors of technology and education. The trend intensified at the end of the month, following statements by the Communist Party indicating its intention to reclassify companies belonging to the private tutoring sector as non-profit companies. The aim of this regulation would be to reduce the financial burden on families for the education of their children, but also to reduce the pressure on them. In addition, tutoring companies would no longer be allowed to raise funds through listings. This news seems to be part of a move to direct financial flows towards the sectors targeted Barclaysby the five-year plan in line with the guidelines set by the Government. The Party also seems determined to limit the growing power of certain companies. However, it subsequently adapted its stance, making it more accommodating, thus allowing the markets to rebound after a series of more measured announcements.

Main Transactions & Contributions

In line with the movements made over the last few months, profit-taking is gradually taking place on the portfolio’s cyclical stocks, through partial sales of stocks that have performed particularly well. Conversely, investments or reinforcements were selectively made on certain growth stocks or on stocks with a more defensive profile. Profits were taken through partial sales of Ivanhoe Mines, a copper mining stock that reboundedparticularly well over the month and since the beginning of the year. Partial sales were made ahead of the results on Fresenius Medical Care, a healthcare company specialising in dialysis.

In terms of purchases, marginal increases were made on Chinese growth stocks (Trip.com, Alibaba, Kingdee, Kingsoft Cloud, Tencent, New Oriental Education). While we currently lack visibility on certain industries, including education, we feel that stocks in the technology sector are being excessively punished, with valuations at their lowest levels in 10 years. Stocks on which we are maintaining our convictions and investment theses over the long term. A new line was introduced in the portfolio, Uber.

To hedge part of the portfolio in the event of a sharp market decline, put options^[4] were purchased on the S&P 500 index to complement our strategy already in place within the fund.

At the end of July, the best contributor to performance over the month was the industrial sector, mainly European, driven by companies that published particularly good results, such as ABB and Airbus. Conversely, the “Leisure / Services” sector was a weaker contributor, mainly impacted by the performance of the Chinese stock New Oriental Education. In terms of geographical exposure, China emerged as the main detractor of performance over the period.

Fund Positioning & Outlook

The fund’s equity exposure increased slightly to around 85%. While we remain confident about the coming months, the development of the Delta variant, the impact of inflation on companies and households and geopolitical instabilities led us to hedge part of the portfolio against a market downturn (Put options on the S&P 500).

We are maintaining our exposure to Chinese stocks. The area represents around 15% of our equity portfolio to date, or 13% of the fund. Investments made in the area cover a range of sectors: technology, leisure, education, insurance. We did not reduce our exposure as a result of recent events. Pending further information from the Chinese Communist Party, we aim to limit the dilution of exposure to the area. Although the Government is sending a positive signal to reassure investors, both domestic and foreign, there are still some uncertainties about the status of the different structures. From a geopolitical viewpoint, discussions are resuming between China and the United States, following the bilateral sanctions.

While, in our view, China could remain under pressure over the coming months, we remain confident about the longer-term fundamentals and growth potential of the companies in the portfolio. From a broader perspective, we remain confident about the markets, particularly in Europe. Exposure to this area within the equity component is at a 10-year high, at 28%. The European Recovery Plan, which started to be paid out in July, should prove to be a strong support for recovery, particularly for industrial stocks. From a corporate viewpoint, the latest publications from companies in the portfolio seem particularly buoyant, like Capgemini, which has significantly raised its targets for 2021. The stock, representing 3% of the portfolio, was thus the best contributor to performance over the month.

We are also maintaining our position in the United States (38%), particularly through our exposure to technology stocks, which benefited from a fall in US 10-year interest rates. The sector’s results were excellent overall, above expectations but with a mixed response from investors. A possible slowdown in growth nevertheless had an impact on some stocks, like Facebook. Alphabet, meanwhile, tripled its profits in the second quarter, driven by increased advertising spending and its video platform, YouTube.

 Completed writing on August 3, 2021

_{[1] Source : Bloomberg, 31/07/2021
[2] Barclays, July 2021
[3] Cyclical stocks are strongly correlated to economic cycles. They therefore benefit greatly from periods of recovery and expansion but are also the first to be affected by an economic downturn.
[4] Put option giving its holder the possibility to sell an underlying asset at a given date and at a pre-determined price. The characteristics of the portfolio are not fixed and may change over time, within the limits of the prospectus.}