May 2022 – Extremely volatile and oversold signals

SFRR reports month end returns of -2.18% (-22.62% YTD), SFPG posts -3.01% (-28.72% YTD) and SFQS ends May at -2.62% (-20.30% YTD) while the MSCI World ended at -1.87% in EUR, the Nasdaq Composite posts -2.06% and the Nasdaq 100 reaches

-1.65%. (-22.54% YTD).

In May the bearish market trend continued up to the 20th, when a weak rebound started that would last until month end, reaching high oversold levels. Speculations about future rate hikes and the lack of control over prices continue to weigh on market valuations.

Fund positioning:

During May we lowered risk and equity exposure, increasing cash and hedges, which impeded our fully benefitting from the month-end rally.

In SF Real Return we reduced the net equity exposure to near 10%, which is now around 30%. With the Tactical strategy at risk-off levels and after lowering our exposure to companies that are sensitive to rate rises, 50% of the fund is in cash. We added a gold and a yen position to the portfolio as hedges against a possible worsening of the economic situation.

In SF Prudent Growth, cash levels spiked up to 25% over the month, and are now around 16%. We have continued concentrating the fund’s portfolio in high quality companies with solid balance sheets, without renouncing growth. Companies’ projections for the next quarters have improved, while supply chain and demand forecasts are moderately optimistic.

Growth portfolio features:

  • Sales growth 2020: +10%
  • Sales growth 2021: +32%
  • Estimated sales growth 2022: +20.1%
  • Potential revaluation to average price-sales ratio of the last 5 years: +47%
  • Potential loss to minimum price-sales ratio of the last 5 years: -9%

In SF Quality Stocks, cash levels spiked up to 20% over the month, and are now around 11%. The companies in this fund are those with the best quality-growth balance, with an 80% exposure to USD, which has helped contain volatility.

Quality portfolio features:

  • Sales growth 2020: +5%
  • Sales growth 2021: +27%
  • Estimated sales growth 2022: +20.3%
  • Potential revaluation to average price-sales ratio of the last 5 years: +44%
  • Potential loss to minimum price-sales ratio of the last 5 years: -3%

After a highly volatile post-pandemic recovery phase and the sharp market correction since the beginning of 2022, we are once again finding attractive valuations for very high quality secular growth companies, that go beyond short-term economic cycles. However, given the bearish market dynamics we prefer to wait before increasing our exposure. This market crisis is the product of an excessive monetary stimulus and a limited offer and sharp reactivation of demand that has triggered mismatches in the production and distribution chains, now starting to return to normal levels. Until these mismatches are fully corrected, volatile valuations and constant rotations from sectors that are more punished by the current levels of inflation to less sensitive ones will continue.

Markets always tend to the equilibrium point in which buyers feel they are sufficiently rewarded for the risks they undertake by medium and long term returns. The higher the known risks are, the higher the upward potential will be during the recovery phase. We are now in the final phase of the cycle, with inflation and excess demand. However, crises are shorter than bull periods: markets quickly move from cycle end to recession, followed closely by a recovery driven by the high levels of interventionism Central Banks have adopted. Markets are quite forward looking, and we will probably reach minimums before the data confirming if the economy will contract or not is released. Over the last few weeks our portfolios’ relative performance vs. indices has improved compared with the beginning of 2022. This is the first step to a certain stabilization in markets, which will once more seek companies with attractive growth rates once speculation on commodities and energy prices slackens. Inflation needs to improve, allowing Central Banks to ease restrictive pressures before the market paradigm can shift significantly.

The most positive note in the macro scenario is that China has begun to reopen after the most recent Covid outbreak and is in a phase of the cycle that allows for a less restrictive monetary policy that could favour its economic growth, considerably slowed down by continuous state intervention in the private sector. However, we cannot ignore the growing tensions between China and the US about the autonomy of Taiwan, strategic for the semiconductor industry. These tensions could hinder collaboration between the two main world powers in facing today’s challenges.

The Russian invasion of Ukraine is now entrenched, with very slow advances and further economic erosion for both parts. Russia insists on its confrontation with the west pressuring through energy and commodity exports. We don’t expect to witness any gesture of dialogue until the economic situation becomes unsustainable for the invader. The most visible economic consequences of the conflict are hiking energy prices, but for developing countries the high price of grain and other agricultural products is equally serious as it could trigger social revolts among the more vulnerable groups.

In currencies there is a notable divergence between Central Banks: the FED is more restrictive, favoring a strengthening of the USD. On the opposite side is Japan, following more expansive policies claiming that inflation is transitory. In the middle is the ECB still deploying expansive policies to help European economies, while announcing rate rises, that help the Euro to fall less than the Yen. Macroeconomic imbalances are reflected in all asset class prices and market trends since the beginning of 2022 but, when at these levels, the risk of a mean reversion that could be triggered by any eventual significant change should also be considered.