August 2023 – Normal correction and buying opportunity

SFRR closes the month at -0.72% (+13.49% YTD)

SFPG ends the month at -6.15% (+16.65% YTD)

SFQS closes the month at -0.07% (+26.41% YTD)

August ended with generalised, although moderate, falls in US indices (S&P 500: -1.77%, Nasdaq 100: -1.62%) and somewhat larger falls in Europe and China (Eurostoxx 50: -3.89%, Hang Seng -8.14%).

By company profile, much better performance of large vs. small caps (Top 50 S&P500: -0.44%, S&P Small caps: -3.77%, Russell 2000: -4.74%).

By factor, Quality (-0.46%), followed by Big Cap Growth (IWF -0.60%), and Momentum (JMOM -1.56%). At the bottom, small caps Growth (-4.73%) and Value (-4.46%).

Our funds had similarly mixed returns this month. Sigma Fund Quality Stocks ended flat (-0.07%), while Sigma Fund Real Return posts good performance in the Momentum and Tactical strategies (down -0.72%). Sigma Fund Prudent Growth suffered more due to its stronger bias to mid-cap Growth companies and fell -6.15%, although YTD returns continue robust: +16.64%, well above the performance of indices that exclude large-cap companies.

In July 12-month inflation reached +3.2%, while last month’s inflation was at +0.2%. While it seems monthly inflation is moderate, it should be considered that this figure compares against last years’ highs. The US economy was still strong in sales and services, albeit contracted in industrial production. Mixed data dragged indices up to the annual meeting of the Fed in Jackson Hole. Both at the annual meeting and in the minutes of the Fed’s July meeting, the message has been similar: Still very vigilant on inflation; no intention of lowering rates in the short term, and open to raising them further if necessary. It will depend on the data. Employment remains strong with a stable unemployment rate below 4%, and less inflationary pressure on wages. The consensus interpretation is that the recession will be delayed to 2024 at the earliest and the battle against inflation will continue for a few quarters more. Rates will remain high for the remainder of the year unless a crisis surprises central banks and forces them to act.

The agreement to raise the US debt ceiling, which has now almost fallen into oblivion, led to the issuance of more debt by the Treasury and to Fitch downgrading US long-term debt from AAA to AA+. This should be taken as a warning to all: using the money machine can have negative consequences. In the short term, US rates rose, and bond prices fell. Negative for US regional banks (KRE -7.49%), small caps depending on these banks for refinancing (RUT -4.74%), and for the High Growth segment (ARKK -11.63%). After the Jackson Hole meeting, economic data has been somewhat weaker and the expectation of a rate hike has been diluted again, prompting a rebound in the sectors that were most severely punished in August.

China continues to make the headlines with continued signs of weakness, which the region’s indices already reflect.

The USD appreciated during August, initially on the back of expected of additional rate hikes, and later pushed by the flight to US debt as a safe haven.

In August second quarter corporate results were released. Overall, companies have beaten expectations and we have seen significant rallies in Novo Nordisk +16.65% (see SF Quality commentary) and Arista +25.88% (see SF Prudent Growth commentary). On the downside, performance of electronic payment companies is noteworthy (PayPal -17.55% and Adyen -54.28%). This segment has a strong growth potential and changes in forecasts trigger abrupt price movements.

We believe the semiconductors and electronic components sectors to be back in the spotlight soon. As forecasts for 2024 in spending in semiconductor equipment point to a 1.3% increase, we anticipate that Applied Materials will resume its growth sooner rather than later. Thus, analysts expect the company’s revenues to start growing in the second half of 2024. In addition, spending in semiconductor capital equipment is expected to increase by 9.5% in 2025.

On the other hand, the artificial intelligence chip market is expected to reach $227bn in annual revenues by 2032 (vs. $17bn last year) representing an annual growth of nearly 30% over the next decade. The global semiconductor market would grow from $500B to $1T by 2030. As this is one of the areas in which we had lowered risk, we will be gradually increasing it again.

Our Trend Following strategies contribution was flat this month, as the foreseen bear market was not confirmed. However, we benefited from our USD exposure where we did pick up the trend change well.

The Tactical strategy on volatility and index futures posted a return of 0.44% for the month. The risk thermometer readings recommended we remain invested throughout the month.