The equity markets panicked briefly in late 2018 before rebounding in 2019 with the best first-half performance since the crisis: the US S&P 500 and the European Stoxx 600 gained 17.4% and 14.5%, respectively. Both indexes have returned to their early 2018 levels. This might seem paradoxical in the midst of a global economic slowdown: the World Bank is now forecasting real growth of 2.6%, and earnings growth expectations for the European index have been revised downwards, to 4.3% for the next 12 months.
But the US economy driven mainly by the excellent health of consumer spending, is on the verge of breaking the record for the longest period of growth in history, beating the previous record that ran from 1991 to 2001. Moreover, investors are focused on the central banks and interest rates. In this situation, “good” economic news – news that would allow interest rates to rise as part of the normalisation process – is not necessarily good news for the markets. Inversely, the markets are not scorning “bad” news -- as long as it’s not catastrophic – because it encourages central bankers to maintain or amplify their accommodating liquidity policies. This is why ad-hoc statements by the central bankers Powell and Draghi were able to cut short May’s market sell off, triggered by Donald Trump’s Sunday tweet threatening to place 25% tariffs on an extra USD 350 billion in Chinese imports.
The longer this environment of low interest rates and abundant liquidity persists, the harder it will be to find an exit strategy, which promises to be complicated if not perilous. With no way of knowing any better than anyone else when this exit will occur, the wise investor has no choice but to concentrate on company fundamentals and valuations. At best, he can observe the generous valuations of the growth stocks that the markets have favoured so far, while the more cyclical stocks are not trading at big discounts. The price/earnings ratios expected over the next 12 months for the global MSCI Growth and MSCI Value indexes are currently at 22x and 13x, respectively. Yet these figures mask major disparities that can be exploited through active portfolio management.
Having weathered this challenging period, our flagship Rouvier Valeurs fund has gained 17.5% since the beginning of the year, while Rouvier Évolution, the hedged version, has gained 11.4%. Rouvier Europe gained 16.4%, a similar performance to Rouvier Valeurs, to which it continues to align its management process. Lastly, Rouvier Patrimoine fulfilled its mission with a gain of 2.9% and a very cautious positioning.