Monthly report of our funds as of 30 April 2024
FUNDS | MTD | YTD | 12 months | 5 years cumulative |
Altex Momentum | -4.80% | 4.75% | 15.86% | 29.81% |
Altex Quality | -4.80% | 5.37% | 18.28% | 55.69% |
Altex Prudent Growth | -7.29% | 1.94% | 9.03% | 37.49% |
Altex Tactical | -3.10% | -0.67% | N/A | N/A |
The correction we anticipated in March was postponed to April. After a strong start to the year, a reversal at some point in the second quarter was to be expected. Our funds lost ground in line with US indices (S&P 500 -4.16%, Nasdaq 100 -4.46%, Mid-caps -6.08%, Russell 2000 -7.09%).
The catalyst for this price adjustment was the US inflation data for March which was released on April 10. Year-over-year inflation rose to 3.5% vs 3.4% expected, core inflation rose to 3.8% vs 3.7% expected, and month-over-month inflation was up to 0.4% vs 0.3% expected. Although the data is disappointing –it cuts short the falls markets anticipated– investors shouldn’t be alarmed: US inflation data was weak only twelve months ago, and lowering y/y inflation from those levels is naturally difficult. Still, we expect inflation to gradually return to normal levels, starting in the third quarter.
US employment data published during the first days of May was the counterpoint to inflation: 175,000 jobs were created (vs. 240,000 expected; 315,000 in April), and unemployment rate rose to 3.9% vs. 3.8% expected. This relative weakness and lower wage pressure anticipate a more controlled inflation down the line, and prompted the rebound that began in May.
Markets now expect the European Central Bank to start cutting rates between June and July, and the US FED to follow suit in October-November. In Europe, growth is very low in the North, with Germany close to stagnation and France showing negligible growth. This adds pressure on Christine Lagarde to cut rates without waiting for the US, despite the risk of an inflation peak in the second half of the year. In addition, further delays in rate cuts by the FED could end up devaluing the Euro vs USD, fuelling inflation.
The script designed by the US Federal Reserve has been, for now, followed to the letter, except for Europe’s rush to lower rates. Sufficiently restrictive rates and a gradual slowdown in the economy increase the likelihood of achieving the difficult, soft landing. Although Jerome Powell, chairperson of the Fed, set a slightly less dovish tone in his last appearance, his decisions were more accommodating. Rates will not be lowered for now, nor will they be raised, since it is considered, current rates adequately contain inflation. However, Powell did announce a slowing down in the pace of balance sheet reduction (bonds and financial assets the Fed bought to stimulate post Covid economy, sold at a rate of 60 billion dollars a month). Starting in June, the Fed intends to lower this figure to 25 billion dollars a month, of which, 15 billion belong to maturing agency assets which will not be renewed. As a consequence, the pace of Treasury bond sales will be greatly reduced, helping to stabilize the US yield curve, and encouraging the purchase of bonds in the market.
With more stable bond prices, equities should also hold up. Corporate earnings are better than expected, and the growth outlook remains positive. However, at this late stage of the cycle, sectors such as construction, automobiles, and capital goods in general, which are more cyclical, are beginning to show signs of slowing down and some caution is warranted.
In our funds, although hedging systems were activated during April, they did not add to monthly returns given the shallowness of the fall. Staying invested with appropriate hedging is the best strategy in this phase of the cycle, which may last for several quarters and markets’ rise can continue for longer than expected. In Altex Momentum, the High Book Return, Shareholder Yield and High Margin blocks outperformed markets, while the US 10-year bond and the Trend Following strategy detracted somewhat. Altex Quality’s outperformance was better than Altex Prudent Growth’s, mostly due to the average size of the companies each fund invests in: large companies held up better than medium sized companies in April. Finally, Altex Tactical performed better given its lower market exposure, as our risk thermometer recommended caution.
Overall, April has been a month of corrections in most profitable assets, which has opened an opportunity to buy and rebalance risk in portfolios, taking advantage of the lower prices to increase exposure.