The main equity markets went through a rough patch in October: in the US, the S&P 500 lost 6.9%, trimming its gains for the year to 1.4%, whilst the European Stoxx 600 index, whose valuation was less demanding, lost just 5.6% but is now down 7% for the year.
This market correction has in part been due to the build-up of tensions in the geo-political sphere. The US electoral campaign and the involvement of the President, the tussle between Brussels and the unlikely Italian coalition, and uncertainty over the Saudi Arabian leadership ended up overwhelming previously phlegmatic markets, at the same time as questions are beginning to be asked about when the current global growth cycle will come to an end. In this area, it is worth noting the tone of statements from BASF, whose third-quarter report highlighted growing challenges in the macroeconomic climate, resulting in a slight downgrading of its 2018 forecasts of global industrial growth (from 3.2% to 3.1%) and chemical production (3.4% to 3.1%).
However, two quarterly reports at the end of September provide some relative comfort: Kuehne & Nagel reported 4.4% growth in global shipping volumes over the first nine months of the year, matching last year’s performance; whilst Schneider Electric highlighted the strength of investment (up 7.4% in energy and 6.6% in industrial automation) and indicated that it expected its markets to remain strong throughout the final quarter and the following months.
The fall in the markets in October was particularly heavy for financial stocks and those believed to be cyclical, which was not favourable to our ‘quality AND value’ approach. The Rouvier Valeurs compartment was therefore down 7.1% on the month, and is down 5.7% for the year to date. The monthly loss for Rouvier Évolution (-5.4%) was smaller thanks to the positive contribution of its derivative hedge. In contrast, the loss was slightly larger for Rouvier Europe, which has a greater exposure to financial and cyclical stocks. For Rouvier Patrimoine, the loss for the month was limited to 1.7%, due to an equity exposure limited, for reasons of caution, to 17.2%.
We believe that the punishment of financial stocks is a knee-jerk reaction rather than a considered sell-off. Paradoxically, it comes at a time when the European Banking Authority has just published good results for its latest stress tests. The scenario adopted for 2020 is particularly severe: it assumes simultaneously that GDP will be 8.3% lower, unemployment 3.3% higher and that real estate prices will fall by 28% relative to the core assumptions, all without any return of inflation. The results show how the banking system has grown stronger; under these conditions it would maintain an average Core Tier 1 ratio of just above 10% (from 9% in the 2016 stress tests, on less punishing assumptions).