After a risk-off summer period, markets were range-bound during September. Political leadership continues to be confusing and is not helping set the course straight for economic development. The Trump Administration is giving out mixed signals about reaching a trade deal with the Chinese government. On the other hand, European businesses are stuck with their never-ending (Brexit) story. Although uncertainty is still high, markets stabilized following central bankers’ dovish interventions, rotating strongly from quality to value.
Equity markets benefited from better-than-expected US economic data points and central bank actions to rebound during September. The Argentinian Merval was among the best performers, returning +18.12%, recovering a bit from the previous month’s panic sell. It was distantly followed by Turkish, Japanese and European stocks, which returned positive mid-to-high single-digit performances. Momentum-driven indices like the Nasdaq Biotech underperformed, declining -3.30% during the month. The rotation from quality to value benefited the Financial, Energy and Materials sectors.
Sovereign yields were volatile in September, but basically finished at the same level as at the end of August. The momentum-unwind at the beginning of September took developed market rates up, before reversing course on dovish comments and further rate cuts from central bankers.
Commodities performances were mixed. The momentum-unwind probably led to a setback in the performance of precious metals.
The HFRX Global Hedge Fund EUR declined by 0.07% during the month.
September was a difficult month for some Long Short Equity strategies. The value factor had its best-performing day since 2001 whereas, at the beginning of the month, Growth versus Value had one its worst 10-day movements in 3 years. Value-tilted managers had a nice tailwind, which helped them print a nice monthly performance figure. On average, strategies with long growth and short value tilts performed poorly because their shorts outperformed their long investments. Specialist funds within the Energy, Healthcare and Technology sectors lagged more diversified strategies due to this sector rotation. While there are no clear catalysts of the rotation, some analysts think that these market movements were initiated by investors taking profits in the long books and covering profitable shorts. Year-to-date, this strategy continues to perform well. The current environment is not easy, due to economic uncertainty and rapid changes in sentiment. However, strong dislocations always create opportunities for either long or short investments. This strategy offers a wide range of levers that can be used to benefit from industry restructurings and sector dispersion from a long or short perspective.
It was a difficult month for Global Macro strategies, where a correction in safe-haven assets was exarcebated by crowded investor-positioning in bonds and equities. On average, Discretionary managers outperformed Systematic strategies. Funds with an Emerging Markets book managed to partially offset losses from long bonds and short energy positions. With developed market rates pointing to the bottom, EM high-yielding assets are starting to become somewhat desirable again. In this environment, we would tend to favour discretionary opportunistic managers that stay on the sidelines looking for asset price dislocations. These managers can use their analytical skills and experience to generate profits from a few strong opportunities worldwide.
September’s performance for Quant Strategies was a mixed bag. Mid-to-long-term Trend Followers suffered from their long bond allocation (rates backed up), equities as well as their commodities (oil and gold investments were detractors). Shorter-term statistical arbitrage strategies benefited from rising volatility levels to post robust performances while staying in the red for the year.
Even if the strategy hasn’t been affected by the spike in the US repo market, returns have been tamed on the back of a low interest rate volatility environment. The new LTRO programme and the Fed’s dovish tone are likely to sustain ongoing swap-spread widenings and create dislocations. On the short part of the curve, the YTD tightening of the OIS libor basis has benefited some funds. It is important to highlight that funding and access to repos is one of the pillars of the strategy and that access to bank balance sheets has become more challenging. Since the beginning of the year, all managers in this space have delivered strong risk-adjusted returns, while being positively exposed to volatility.
Emerging Markets, mainly recovering from previous losses and benefitting from improving investor sentiment on relative value analysis, performed well during September. Although the big picture still presents high levels of uncertainty, in a sluggish growth environment, EM assets remain interesting opportunities for investors hungry for yield. Furthermore, declining US rates have only managed to postpone the problem of dollarized-debt EM economies. Argentinian elections in October will be closely followed as a future indicator for the country and EM investment attractiveness. It has not been an easy environment for EM strategies. Nevertheless, there are strong dislocation-generating opportunities for seasoned opportunistic managers.
2019 has been an average year for Event Driven strategies, especially compared to the more directional strategies. Pure merger arbitrage strategy performances have been rather muted. Economic and political uncertainty negatively impacted the volume of announced M&A announcements. However, we are optimistic about the opportunities for Risk Arbitrage due to a supportive business environment with benign financing conditions and the willingness of corporate management teams to fight for sources of business growth. Also, spreads for large deals are currently at interesting levels due an increasingly complex approval process, specifically in the US. It is also interesting to note that the increase in shareholder activism challenging announced deals is also helping keep spreads wider. Finally, in countries like Japan, some managers are pointing out that corporate governance initiatives have led to several significant cross-shareholder unwinds over the past few months.
The 2019 risk-on environment reversed most of the spread-widenings seen in Q4 2018. Distressed and stressed strategies are currently tending to overweight their portfolios with hard-catalyst investment opportunities, which are diminishing the negative impact of beta. Managers are raising cash levels for dry powder with which to reload the portfolio with the new issues hitting the distressed market. We are closely monitoring distressed managers, due to the potential of high expected returns, but remain broadly on the sidelines.
Despite some more volatility, spreads – supported by the chase for yield – are still heading in the same direction. Hence we remain underweight, as there is limited-to-no-comfort in being short the credit market, where there is strong demand and the negative cost of carry is quite expensive.