October 2022 – Market floor put to the test and significant rebound

The September inflation data was released in October. Although the month started with positive expectations and a 6% rally in the S&P500, the disappointing US inflation data triggered an -8% plunge and the June lows were lost for a few days. However, the market rebounded strongly (11%) fuelled by oversold markets and hopes of better inflation data in November, ending in positive territory.

We managed our portfolios adopting a cautious stance in November, accumulating Growth positions, reducing our exposure to defensive assets, and by dynamically hedging the funds against further falls in case the lows would not hold.

SFRR closed the month at +1.75% (-29.83% YTD), SFPG -0.34% (-36.01% YTD), SFQS +3.24% (-26.62% YTD), while the MSCI World ended at +6.05% in EUR (-9.22% YTD in EUR).

Our equity strategies contributed positively to returns, although lagging indices given our lower exposure to energy, and the wide dispersion of results. Of note were Medpace in Momentum (+41%), Dexcom in Growth (+48%) and Costar in Quality (+18%). The worst performer was Meta (-31%) dragged by fears that the company would be unable to control expenditure due to its commitment to the metaverse. The possibility of decreasing exposure to Meta was considered, but after an in-depth analysis of the company and the metaverse’s potential, we decided to increase our position in the Sigma Fund Real Return as soon as Meta showed signs of improvement.

Meta has turned into a giant start-up with a huge potential that will not require further capital increases. With 3.7 billion users, Meta is the company that has managed and capitalized human interaction in social networks best, it is called to lead the revamping the virtual space evolving from photos, videos, and text to touch, 3D vision, and immersive sensory experiences. In essence, Meta is looking to replicate the Appstore model using a device that could superannuate TVs and tablets: virtual reality glasses. The stakes are high and so is the risk of squandering large amounts of money on testing, but Meta has the advantage of dominating virtual social interaction, having a recurring source of revenue (117.9 billion/year) and a valuation that would skyrocket just by selling the company piecemeal. Facebook, Instagram, Whatsapp, Quest…. and 40 billion in cash have all traded at less than 240 billion. If Elon Musk can afford to buy Twitter for 44 billion or Snapchat can go public at 33 billion (now valued at 17 billion) at a stage where it is still losing money, betting on Meta may be considered as taking a defensive stance.

In currencies, we continue to hedge USD and accumulate a long EUR position in anticipation that the Fed’s attempt to control inflation by speeding up rate increases will also mean that such increases will peak sooner in the US than in Europe, where the ECB will be forced to raise rates despite its slower growth to avoid an excessive currency devaluation.

In conclusion, having recovered the June lows, markets are still in a sideways phase in what we consider to be a floor formation. Central banks try to avoid both extremely depressed markets that could force them to lower rates to –once again– rescue the economy, and overheated markets that could continue to push inflation up, calling for higher rates which would translate into a deep recession. Powell was very clear at the 2 November conference: since markets always anticipate the Fed’s moves, financial conditions ease or tighten even before the Fed actually announces its decisions. After the 4% rate hike on 2 November, Powell paved the way for slower rate increases (50bps in December, and more modest rises in 2023), warning markets, however, to not relax, since it is not anticipated that the easing will take place in the short term, and the terminal rate (the highest rate after several increases) could be higher than expected. However, even if the Fed’s reaction depends on how inflation evolves, we can expect pro-market messages if there are signs of recession and harsher and more restrictive messages if the markets get too euphoric. In this phase we are accumulating/buying on dips, and rebalancing when important resistances are reached.