September 2021 – Downturns in a market that remains bullish

September was volatile and with profit taking, but all within expectations. As atypical as a post-Covid year is for the markets, September is traditionally a negative month for the stock markets. This year has been no exception and the market started to retreat from the highs of September 6th. The good news is that October is usually positive, and the last quarter of the year is the best out of all four. For now, nothing suggests that this will not be the case.

SFRR closes the month at -2.82% (+6.69% YTD), SFPG closes the month at -3.75% (+14.20% YTD), SFQS closes the month at -2.54% (+19.27% YTD), while the MSCI World ends the month at -2.34% in EUR, (+18.08% YTD in EUR).

This month, equities that had previously risen the most, experienced the biggest downturns. Our Quality shares performed very well in relative terms (Quality -2.54% vs S&P 500: -4.76% and Nasdaq: -5.32%) – better than its peers and market indices. The large exposure we have to USD also helped.

In Sigma Real Return and Sigma Prudent Growth we have a higher exposure to more volatile stocks and the declines were greater in comparison to the indices, but a large part of their drawdown was offset by gains in hedges, which allowed us to end the month with a significant relative gain. In Real Return, the Tactical strategy ended September with defensive positions. In both funds we increased hedging through index futures sales and options strategies. We had already had a short position on Nasdaq for weeks and this paid off in the second half of the month.

The beginning of October has been equally volatile, but the increased hedging in the funds has meant that, on the 6th of October, all 3 are already in positive territory. We see this correction more as a buying opportunity than an excuse to reduce risk. We have already proactively reduced risk in the funds with a flexible mandate, complementing it with strategies that will allow us to ride eventual rebounds.

There are macro risks that we monitor very closely. These are important risks, but not enough to break the market uptrend. They will cause a wide dispersion in the performance of different industries and companies. Now is the time to be very selective and review the quality of the assets in the portfolios:

  • • Inflation: Data causes concern with figures above 4% in the USA but the main risk is not inflation, it is central bank decisions. For now, those responsible for monetary policy consider the rise to be temporary and are not announcing aggressive moves. If inflation remains high, the most profitable assets will continue to be equities, real estate, commodities, precious metals and cyclicals in general. Markets fear regulatory changes and contractionary measures, not inflation. If the former are kept in check, inflation will also tend to self-regulate. Inflation will benefit companies with the ability to raise prices to their customers, cyclicals, and commodities. We prefer the first two segments for their higher shareholder returns. We will continue to avoid banks because of the risk that their revenues will not grow as expected by the market.
  • • Semiconductors: semiconductors are available, but not to everyone. This situation will widen the gap between companies with more buying power and smaller ones. As long as there is a shortage, bigger companies will be favoured. Shame on those who sell their FAAMGs… We did reduce exposure to component manufacturers months ago because of the impact that the inability to increase their supply in the short term could have on their accounts.
  • • Energy: major price distortion caused by the disorganized intervention of the political sector in Europe and China, mismatches of supply and demand during the recovery from the crisis, and the increased production of renewable energy. Putin has taken advantage of this to improve his image by appearing as the great white knight coming to supply Europe and Asia with generosity and loyalty to his trading partners. It is a sector we prefer to avoid and its impact on our fund companies should be limited.
  • • Logistics: the reopening of trade and increased demand for freight services has increased costs and, worse still, generated a shortage of supply that directly affects the supply chains of large sectors. Wholesalers accumulate stock and retailers bear higher costs. This will imply a significant risk for industrial companies and finished goods trade. The service sector and those with low dependence on the supply of intermediate components are safer investments.
  • • Evergrande: despite the media noise, the potential impact we see is very limited and quite isolated in China. Little relevance to global systemic risk.

This list of risks is not intended to cause alarm but to reinforce the importance of correctly assessing and analysing which factors are affecting markets. The most important one is still a company’s ability to grow profits and generate cash. The sectors we are present in continue to improve expectations for 2022 and the financial health of the companies we have in our portfolios is very high. In a bull market, corrections along the way are normal. We use advanced hedging techniques to make the ride more comfortable, but the backbone of profitability continues to be the real businesses within the portfolios and their financial performance during and after Covid is exemplary. In a period of positive inflation and low rates, being in companies that are growing above average is still very attractive. It will be the best way to protect the purchasing power of the assets in the medium and long term.