October 2023 – Market falls back while support holds

SFRR ends the month at -3.99% (+6.20% YTD)

SFPG closes the month at -5.06% (+8.79% YTD)

SFQS ends the month at -3.41% (+17.49% YTD)

MSCI World ends at -2.80% in EUR (+7.41% YTD in EUR)

In October markets corrected against an environment that had been bullish till now, encouraging investors to buy when markets reached support levels: 4100-4150 for S&P 500 and 14,000-14,200 for Nasdaq 100. The remarkable rebound of the first days of November, confirmed the positive trend that started in the last quarter of 2022.

Bonds (fixed income) were, once more, the destabilising factor of the month and curbed the performance of equity markets. Interest rates on the US 10-year bonds rose from 4.575% to 4.933%, reaching an intraday high of 5.021% on 23 October. This triggered fall of around -3.5% in bonds, dragging long-term industrial sectors, such as artificial intelligence (BOTZ -7.89%) and innovation companies (ARKK -11.57%), as well. In the case of broader indices, such as the S&P 500 (-2.20%), some sectors held up better: Utilities +1.29%, large cap Technology +0.05%, Communication -1.30%, and Consumer staples -1.38%. On the downside, Telecommunications fell -6.89%, Metals and Mining -5.79%, while Energy dropped -5.79% and Consumer Discretionary -5.52%.

October was a reminder that interest rates impact smaller companies the most. Thus, the top 50 of the S&P500 declined -1.38%, while the Russell 2000 (smaller companies) fell -6.88%. On the positive side, Gold (+7.22%), a clear beneficiary of high inflation and confidence crises in the financial system.

On the macroeconomic front, the war between Israel and Hamas had little impact on markets despite the media coverage and the humanitarian drama. Markets were more focused on interest rates and the Federal Reserve’s messages. In fact, markets declined until the 27th, just before the Fed meeting of the 1st of November, in which the Fed maintained interest rates unchanged and its hawkish tone in an effort to dampen an excessive euphoria in markets. Our conclusion is that the American monetary policy maker is confident that current interest rates (5.50%) are high enough to slow down the economy (and inflation) without knocking it out. The Fed’s discourse continues to be aggressive, looking to keep financial conditions tight for investors and consumers and restrain inflation. At this point, recession is expected, and markets are discounting lower rates starting the second half of 2024; however, we have been expecting a recession for such a long time that some sectors and stock types have already fallen too far, and the potential for their recovery is greater than the potential for their decline. It is impossible to accurately anticipate the depth and timing of the recession, and since not all sectors will be perfectly aligned with the economy as a whole, it is more practical to analyse the performance and attractiveness of each sector and factor individually when building a robust portfolio. While dispersion among assets is extraordinarily high, the opportunities to be found in the markets are also considerable.

After the October correction, our Funds are still well positioned to take advantage of the opportunities offered by markets that, against all odds, remain bullish and are set to end the year significantly positive. Hedging systems did not contribute significantly as declines faded into a correction, while a bear market did not finally materialise. Shorts detracted from returns at the beginning of the month but recovered at month end. Currency hedging did add 8 bps to performance, since after the recent USD rally, its pullback allowed us to capture returns through options. November started with a strong rebound in Funds with a bullish stance and good prospects for the fourth quarter of the year.

Starting in December we will use both index and currency hedging in the Sigma Quality Stocks Fund, which will be renamed Altex Quality. Sigma Fund Real Return and Sigma Fund Prudent Growth will be renamed Altex Momentum and Altex Prudent Growth, respectively. Under the new name, Altex, our offering will include 3 equity Funds, based on the 3 factors that bring higher long term earnings to medium and large companies (i.e., Quality, Momentum and Growth). All three Funds will use tactical hedging which should allow us to significantly reduce falls in future downturns.

A new Fund will also be launched, the Altex Tactical, which aims to outperform the S&P 500 and reduce its maximum drawdown to less than half. It is designed to capture volatility and index returns, while deploying tight risk controls, and has the capability to become fully liquid in adverse markets. The launch date will be announced shortly.