January 2021 – Back to a volatile normality


In January returns once again beat expectations: SF Real Return +0.02%, SF Prudent Growth +1.86%, SF Quality Stocks –0.20% (vs MSCI World Index in EUR -0.30%).

Market Commentary

Our mid- and long-term scenarios are still positive

Market background is positive, we are still in a recovery phase with volatility and falls at expected levels in the aftermath of a crisis with severe economic consequences. Bull markets continue backed by capital flowing into stock markets and out of money markets. Management must be flexible to avoid corrections, while keeping long-term objectives in sight. All in all, corrections are more an opportunity than a red flag.

Central Banks continue committed to carrying out expansive policies and overlooking inflation in the short-term.

Corporate earnings are still on the rise, backing positive recovery perspectives.

Short-Term scenario: Risk on the rise and increasing hedges

Even though there were signs of market exhaustion, and increased volatility in January, our long-term outlook did not change, although we did slightly reduce short-term risk. While cyclical assets rallied at the beginning of January and ended it posting slightly negative returns; defensive assets did the opposite, and indices fell and quickly recovered (3 days falling and 2 days to recover). This month’s turbulences can be accounted for by two main reasons and a catalyst:

• Underlying causes:

1) The back-and-forth regarding US fiscal package: an extension of USD 1.9 trillion was announced, although it is still under discussion. The Market’s initial reaction was quite positive but cooled down as conversations stretched out.

2) The inefficient vaccine distribution in Europe triggered an increase in mobility restrictions. Negative reaction in cyclical assets and the euro.

•The catalyst:

Market tensions peaked with the trading platform “Robinhood” episode: although Robinhood has been operating for years, it hit the spotlight at month end when its users colluded to purchase shares for which the short positions held by large investment funds were publicly known. Equity short sales held by investment funds must be closed when price rises to its short sale loss limit, making sellers vanish and forcing investors to buy at any price: this is known as a “short squeeze”. In this backdrop, the true quality or fundamentals of the company become irrelevant. In addition, to preserve balanced portfolio weightings, when short positions are closed, long position must also be undone, and this in turn makes markets plummet.

Although this episode was short-lived –markets quickly regained losses– the underlying tension remains, and we increased our hedges above the levels held at the beginning of January.