July 2021 – China is scary, but markets look the other way

Our three funds report excellent returns this month, despite increasing tensions in markets. At month end, SFRR posts +1.95% (+7.49% YTD), SFPG returns +5.32% (+16.61% YTD) and SFQS rises +0.93% (+20.36% YTD), while the MSCI World reports month end returns of +1.64% in EUR, (+17.62% YTD in EUR).

Brilliant performance of all our equity portfolios in July, especially Prudent Growth (+6.13%), that had missed out on the profit increase and positive results of numerous companies. Performance of the Momentum strategy was also outstanding (+4.64%): the combination of positive trends in fundamentals and price allows us to rapidly adapt to market changes. Quality’s shares also added to YTD returns (+0.93% in July): capital reinvestment in these companies, that have demonstrated their resilience even in times of risk aversion, continues to build up profits.

In the Sub-Fund commentaries, we review three of July’s winning companies: Alphabet (Quality), Vitrolife (Prudent) y QT Group (Momentum, in Real Return). Alphabet’s extraordinary growth and the increase in its advertising revenues dazzled markets; Vitrolife beat all expectations after announcing the purchase of Igenomix, while the QT Group, which we discovered thanks to our equity screening engine, was up 16%.

Market performance was, on the other hand, uneven: while defensive and high-quality shares post positive returns, higher risk shares were hurt by escalating tensions in stock exchanges throughout July. Corporate results for the second half of the year were extraordinary, with several upward revisions of profits and 2021 expectations. Markets are rising at a pace with profit increases, and, although prices are in the higher levels, they are not yet too expensive. However, several issues call for caution:

  • In China, public and private sectors are battling over the increasing influence of large financial conglomerates (social networks, payment methods, fintech, videogames, …) After the intervention and expropriation of profits in the private education sector announced on July 24, Chinese Government has reminded all that they prioritize population control over legal security and attracting foreign investments. Unfortunately, all are losers in this battle: growth will begin to stall and there will be less resources available to all. We have decreased our already low exposure to China to negligible levels.

  • Covid variants are frightening Governments, despite the fact that hospitalization data are somewhat encouraging. Vaccination is effectively containing severe cases, including those caused by the new variants. Dark clouds seem to be again looming in the horizon for sectors such as tourism, but we hope that positive reports from the scientific community will soon disperse them. Some Governments seem to be unnecessarily alarmed, and the best policy still is to listen to doctors.

  • The Fed and Jackson Hole will be setting the tone in August. That economic stimulus withdrawal has already begun is signaled by the fact that it is (at least) being considered. Indeed, it is the main point in the agenda of the annual meeting of the world’s main central banks’ governors, economists, and authorities, and markets will follow its outcome closely.

  • Shortage of supply continues to distort prices and supply chains. Being a crucial sector, it can affect global indices growth expectations considerably: in addition to its potential impact on Technology, semiconductors have become indispensable to other sectors such as auto, industry, or medical equipment. We will be monitoring this sector closely.

Our main investment focus is to continue to be invested in growth companies in sectors with the greatest potential for expansion. We will also maintain a low exposure to China –given the unfavorable investment environment created by Government policies– and medium to high hedging levels (around 60% futures hedging in Real Return and Prudent Growth). We have slightly increased (5%) cash holdings in Quality for the first time since 2020 lows. Our risk thermometer’s readings remained moderate throughout July (except for one day) allowing for high investment levels and dynamic management of market corrections. Until now, markets have not shown any signs of weakness, but we will keep an eye out for changes.