Last-quarter market trends

Analysis | October 3 2018

Management Letter

Catherine Wajsman answers a series of questions aimed at understanding third-quarter market trends.


1. Did third-quarter market trends surprise you?

In a nutshell, we saw no crash on financial markets this summer. The summer was “hot”, but only in terms of weather.


2. What factors were predominant this quarter?

In Europe, the populist Italian government threatened the budgetary status quo and the migrant crisis led to the country’s rating being placed under watch; Brexit continues to inject a generous dose of mystery; Germany’s Chancellor is unsupported within her own party; the upcoming European elections are exceptionally unreadable.

Outside Europe, several emerging countries became vulnerable: Venezuela, Brazil, Argentina, Egypt, South Africa, Tunisia: the Argentine peso fell 70% since the month of May.

The third quarter was marked by significant disparities in market returns:

  • Share prices rose in three sectors in particular: high-tech, luxury goods and oil.
  • American markets expanded across the board: the S&P, NASDAQ. In August, the S&P rose 8.8%, while EUROSTOXX 50 fell by 3.5% and emerging markets by 4.5%.
  • More generally, from January 1 to September 30, the S&P 500 gained 9%, whereas the European share index fell by 2%.


3. Given the diverse results of funds, how do you explain the almost systematic negative returns of flexible and diversified funds?

It appears evident that diversified funds were under-invested due to a fear of excess volatility caused by the unpredictability of President Trump. In addition, high valuations of growth stocks most likely worried flexible and diversified fund managers, resulting in an underweight rating of these stocks, which outperformed markets. Lastly, bond markets hindered these returns by a few points: hence our preference, for some time now, for a share/cash allocation strategy.


4. How do you explain the outpacing of value investments by growth stocks since the beginning of the year?

They benefited from low rates which favoured companies with good visibility on long-term profits. Examples include tech and health stocks.
Clearly, market prices will suffer more dramatically in the event of firedamp; plus, they will be burdened by a rate increase, particularly if markets believe they are overvalued.

Will this translate into a boost for industrial and financial stocks instead? Not necessarily.


5. How do you explain the slowdown or even slump in some commodity prices, and how you feel oil prices will evolve?

Interestingly – and contrary to what happened before – safe havens are no longer popular, even in a context of political tension. Concerning base metals, investors are playing close attention to trade negotiations between the U.S. and China.

Oil prices will depend on whether curbed production in Venezuela and Iran leads to a price increase, or whether OPEC will be able to compensate by increasing production.


6. Early in the year, you believed hedge funds would expand. Are you disappointed?

Most definitely so. We believed that volatility – which we correctly anticipated – would produce good returns, both for VIX volatility index funds and hedge funds, which earn returns on market variations. This wasn’t the case. The €300 billion or so invested in these strategies took a hit. We were right to move away from hedge funds from 2008–2011 onwards, after 30 years of uninterrupted growth. We believed these strategies would attract new interest in 2018.


7. Is it reasonable to believe that political problems in Europe and elsewhere have already been anticipated by markets and ‘subsumed’ into prices, making a certain stability possible?

No. Nirvana does not exist in financial markets. Certainly not in October. Every day brings with it statistics, statements, and even disasters. This year in particular, November mid-term elections in the United States and the weeks preceding them will come with surprises.

The challenge for a management company such as ours, which engages in stock picking and open architecture, will be to identify which stocks and which managers can best ride out moodiness in the markets.