Equity markets fell sharply in the final quarter of 2018. The European Stoxx600 gave up 11.9%, taking its loss for the year to 13.2%, whilst its US equivalent, the S&P500, lost 14%, closing the year down 6.2%.
This underperformance is primarily the result of cuts in earnings growth forecasts for 2019 (from 13% in early October to 7% by the end of the year for the US index). Analysts have factored in the economic slowdown seen at the end of the year. For the US economy, the Fed has made a similar move, cutting its 2019 GDP growth forecast from 2.5% to 2.3%. There has been particular concern about China, with the head of Apple highlighting “the scale of the slowdown in the Chinese economy” when explaining the cut in expected revenue for the final quarter of 2018, from the previous estimated range of between $89 billion and $93 billion to $84 billion (compared to $88 billion in Q4 2017).
At the same time, we have seen a fall in prospective price/earnings ratios (from 18.5 at the end of 2017 to 14 for the US index) and rising risk aversion, as illustrated by falling long-term interest rates in the final quarter (from a peak of 3.23% on 5 October to 2.69% by end-December for 10-year US bonds, and from 0.57% to 0.24% for the Bund). There is no shortage of reasons for these concerns: disruptive elements specific to Europe (the still unresolved terms of Brexit, the situation in Italy and the ‘Gilets Jaunes’ in France); growing awareness that prospects for international trade are dependent on an unpredictable US President; rising risk-free interest rates and their impact on the cost of borrowing; and, in the case of Google, Amazon, Facebook, Apple and the likes, a questioning of the paradigm of unlimited growth.
We were not satisfied by the performances of the various compartments of the SICAV in 2018.
Rouvier Valeurs was down 12.8% over the year, with 1.9 points of the fall due solely to the situation at Atos, which has been discussed in previous editions. The fall in the final quarter was 14.1%, taking the discount on the portfolio to over 30%, thus indicating its potential to bounce back. Its hedged version, Rouvier Évolution, fared only very slightly better (down 12.6% for the year and 11.6% for the final quarter). Its permanent hedge generated barely more than its cost, and we are working on ways to improve it.
Rouvier Europe had a difficult year, marked by indiscriminate downward pressure on financial stocks (23% of the portfolio) and small capitalisations (38% of the portfolio below €5 billion). It was down 18.3% in the final quarter and 22.6% over the year.
Rouvier Patrimoine lost 4.1%, with a final-quarter loss of 3.5%. Its bond core made a negative contribution of 1.2% over the year, suffering from increased aversion to risk on corporate bonds (35% of the portfolio with a negative contribution of 1%), that was particularly acute for certain names within automotives and financials. Despite the difficult ending to 2018, the fund’s floating rate positions represent a strength for the future. Lastly, its equity component (17% of the portfolio) held up well, with a loss limited to 7.9%.
In an exact opposite of the start of 2018, 2019 is beginning against a background of reduced estimates and normalised, even attractive, valuations. The continuation of geopolitical uncertainties argues against any hope that multiples will rise again. However, wage growth in the USA and Europe, the Fed’s renewed room to manoeuvre and the levers available to the PBOC to stimulate the Chinese market do make it reasonable to expect continued global growth – which, though slower, will be sustainable – of which we must take advantage by maintaining our twin criteria of the quality and durability of the companies in our portfolios on the one hand, and their valuations on the other.