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Didier Bouvignies, General Partner & CIO Ludivine de Quincerot, Portfolio Manager & Spokeswoman
The summer has seen an intense period of news, especially at the political level, which has fuelled volatility in financial markets. In this context, Didier Bouvignies and Ludivine de Quincerot explain the strategy implemented through R-co Club.
During the last quarter, R-co Club’s performance suffered from a positioning characterised by low bond sensitivity. Its overexposure to peripheral bonds, particularly Italian bonds (which had an unusual trajectory with a 160 basis point decline over three months), as well as exposure to Spanish bonds, were focused on too short maturities to offset the negative impact of its negative sensitivity to German bonds. The overweight exposure to equities only played a minor role, as our investments were mainly in securities with low valuations that did not benefit from the decline in interest rates, as was the case for growth stocks.
Currently, it is very difficult to find arguments to support the view that a global reversal can be avoided. However, without ignoring the warning signals outlined above, there is evidence that suggests that it is possible, beyond the political context (an important element), to maintain moderate growth and, consequently, to normalise the valuation of the various asset classes.
Indeed, this eventuality, which certainly contradict the prevailing pessimism, suggest that the particularly high valuation of bond-related assets, and low valuation of stocks affected by the current concerns and falling interest rates, are proving to be effective in a scenario of easing fears around the Sino-American trade dispute, fiscal stimulus initiatives, and, more generally, in a context where consumers have the ability to restore the morale of industry.
With its high equity exposure and low sensitivity to interest rate risk, R-co Club, both within its bond and equity portfolios, is adopting an alternative view whereby the worst would be avoided, as opposed to a majority view that has seemingly already resigned itself to the idea that rates will not rise again. As a reminder, between June 2016 and March 2017, they rose by 50 basis points and stocks with modest valuations rose by 26% in six months.
Within the equity category we prioritise European assets by recommending a selection of large-cap stocks with low-cost valuations. These valuations seem attractive to us, both historically and relative to other asset classes, especially in an environment where there are no longer any real safe haven investments.
However, given the advancement in the economic cycle, the new holdings we included in the portfolio in 2019, while retaining a significant restructuring potential, are less exposed to the economic cycle than those we invested in between 2012 and 2017. Indeed, the improvement in their results will result more from the change in their competitive positioning and better operational efficiency than from the acceleration of the growth of their end markets.
