August 2020 – Extraordinary Rally

Market commentary

This is the fifth consecutive month of market rally since March’s minimums, with prices on the rise backed by better than expected corporate results and positive developments in vaccine investigation and testing.

In August, our portfolio hedges have been below our historical average as, contrary to market consensus, our core belief is that global economy will recover and the Covid-19 will be contained earlier than is currently discounted. Against this backdrop, we have been dynamically managing USD hedges, taking long EUR positions as tensions relaxed in the markets and the FED took on a more active role than the ECB in monetary easing policies.

Since markets were already reaching the levels we had anticipated for the Q4 in August, we gradually increased portfolio hedging to around 25% –still below our historical average, although sensibly higher than previous month’s hedging levels. We have also been increasing our exposure to cyclical companies with encouraging post-Covid growth perspectives.

As of the date of writing this commentary, September 7, markets have already rotated from Growth and Momentum to Value twice, and our August positioning has helped mitigate part of the blow. However, we feel this market correction will be short lived since economy is recovering and market momentum is positive. Corrections are not rare and indeed are –to a certain extent– salutary as they open opportunities to purchase companies with above average growth ratios at attractive prices. Regained optimism will also favor many growth companies that had had to lower their growth plans because of the lockdown: by August we had already added Amadeus and Booking to Sigma Fund Quality Stocks and Fox Factory and Align Technologies in Sigma Fund Prudent Growth.

Looking forward a few months, we believe that current market dynamics will continue, albeit marginally clouded by US elections. We are gradually increasing our exposure to growth companies that are called to benefit from an early contention of Covid-19, to allow us to increase index hedging vs. USD hedging levels in our portfolios. With Central Banks committed to promoting employment and economic growth, and to easing inflation limitations to allow for a longer expansion, global indices –especially in the US and China– should comfortably beat their maximums next year, even if such rises are accompanied both by volatility and short lived corrections. In this scenario, our best recipe is to focus on the long term and invest in companies with the sturdiest growth perspectives. FAANG companies, now abandoned by some investors, will continue to set the pace in the short and medium term, and an investor’s best friend is a company that is growing; beware of entering companies that are posting losses or are not growing simply because shares are cheap.

Headline news next month is that Sigma Fund Real Return will open positions in the Tactical strategy. This strategy has been developed and streamlined internally by Altex after Juan Durán joined our team, and it seeks to optimize market exposure using a risk thermometer based on objective and measurable market data. Combining relative performance, momentum, volatility and risk factors, this thermometer calculates market temperatures ranging from 0 to 100, where low temperatures will allow for a higher market exposure and higher temperatures will call for defensive –including short– positions. This thermometer is a great complement for our portfolios, that permits us engage in an even more dynamic management style.