January 2023 – Inflation eases and the market picks up steam

SFRR closes January at +8.70%, SFPG at +8.05%, and SFQS at +11.56%, while the MSCI World ends at +5.49% in EUR, the S&P 500 at +6.17%, the Nasdaq 100 at +10.62%, and the Eurostoxx 50 at +9.75%.

All 3 funds have performed very well this month. A good result to celebrate the authorisation by the Luxembourg regulator to harmonise the funds under the European UCITS regulation, which provides a higher degree of protection, control, and transparency which will benefit shareholders. With this authorisation, ratified at the shareholders’ meeting held on 27 December 2022, the funds become UCITS, facilitating their marketing and future growth.

In Real Return, the Momentum (10.52%), Quality (12.16%) and Tactical (+5.95%) strategies contributed positively. The USD hedge, which helped buffer the 1.5% decline in the US currency during the month, also made a positive contribution to performance. Trend Following strategies on the S&P500 and Nasdaq minimised hedging costs, detracting only -0.26% from returns. In Prudent Growth, stocks contributed +7.45% while the Nasdaq hedge subtracted -0.44% from performance. In Quality Stocks, equities contributed +11.56% and USD exposure subtracted -2.03% from returns.

Recovery at the start of the year has been widespread. As expected, a renewed appetite for fixed income coupled with inflation containment, has been strong a support for equities’ momentum. The most favoured sectors were Consumer Retail (+16.11%), Semiconductors (+16.01%), Construction (+15.14%) and Technology (+9.23%). Significant laggards were Utilities (-2.00%), Healthcare (-1.83%) and Consumer Staples (-1.09%).

This sector rotation belies a recession scenario, in which non-cyclical sectors should do better than cyclical ones, and also contradicts market consensus, which expected a very negative start to the year, in line with December’s decline.

To avoid polarisation towards a certain scenario, at Altex we always take into consideration the information provided by all areas of analysis: Macro, Technical and Fundamental.

In the Macro area, leading indicators such as house sales, industrial orders and the interest rate curve have been losing strength and point towards a recession. However, positive employment data is keeping the economy in good shape and temporarily warding off the spectre of recession. The rise in interest rates is tightening, but not yet suffocating, and Central Banks are now more timid when it comes to forcing the economy to slow down. After the first signs of inflation being under control, liquidity has flowed into the US market via two channels: on the one hand, the US Treasury has transferred liquidity to commercial banks because of the legal debt ceiling, increasing their lending capacity as a result; on the other hand, the Federal Reserve has fostered an increase in liquidity by reducing the daily volume of dollars it drains from the market through reverse repos. The Fed’s discourse is also more moderate, pointing to a slower pace of rate hikes, albeit conditioned by inflation data.

Technical analysis points to a significant improvement. The S&P500 has risen above the 200 moving average, and the 50 moving average has risen above the 200 moving average (golden cross on February 2nd), while the 100 moving average has managed to return to a positive slope. Overall, the oscillators are showing a better momentum, and a strong resistance zone has been reached between 4100 and 4200 which will help to gauge market strength. High market beta stocks have outperformed low volatility stocks, cyclical sectors have outperformed non-cyclical sectors, and small cap stocks have risen more than large cap stocks. Despite still being in a rather fragile sideways market, the days of breadth thrust, the higher number of companies reaching 12-month highs versus new lows, and the good performance of fixed income give a more positive outlook from a technical perspective.

On the Fundamental analysis side, expected corporate earnings growth continued to adjust downwards, but without major shocks. The percentage of companies that have delivered better than expected earnings for Q4 2022 stands at 70% as of February 3rd. The 12-month forward P/E ratio of the S&P 500 stands at 18.4, still higher than the average of the last 10 years but already trading at more reasonable valuations. In the Mid-cap (S&P 400) and Small-cap (S&P 600) segments, valuations are much lower (12-month forward P/E of 14.6 and 14.2, respectively).

The current environment offers good opportunities in equities (Growth, Technology, Biotech, Small Caps, and Emerging Markets Asia) and in fixed income with a duration of between 4 and 10 years (both US and Europe). This allows for more diversified portfolios. We remain cautious on the USD, although most of the excess accumulated last year has already been reversed and the EURUSD could find some resistance in the 1.09 – 1.10 area, if markets continue to price in a sufficiently high risk of recession. Our stance remains unchanged: Central Banks will continue to deploy restrictive policies, with a greater sensitivity to growth and employment data developments. In this scenario, with a moderately high, but not soaring inflation, we’d see a stronger recovery in the worst hit sectors in 2022, and a certain degree of consolidation in more cyclical sectors.