September 2019

The US S&P 500 and European Stoxx 600 made gains in September of 1.7% and 3.6% respectively (18.7% and 16.4% respectively for the year to date), taking them close to their highs of last year (1.6% higher for the S&P, 2.2% lower for the Stoxx 600).

Equity markets value companies on the basis of their future earnings, with the multiple (and thus the price) rising as a function of the degree to which investors are confident that a company will achieve these earnings. At the moment earnings are expected to continue to grow (at around 4% or 5% for European markets) despite growth having been revised downwards, whilst market prices have stayed stable, reflecting a clear but limited increase in risk aversion. This may seem paradoxical given the multiplication of sources of macroeconomic and geopolitical uncertainty which we will not detail here. We would merely list, for September alone, increasing tensions in the Middle East, the onset of recession in world trade, the deterioration of business sentiment in Germany as reported by the PMI Markit index (41.7 in September, from 43.5 in August -- taking it to its lowest since 2009) and the growing prospect of a no-deal Brexit.

However, it is the prevailing regime of low interest rates, previously discussed on these pages, that changes the picture. The lack of long-term yield on debt markets, as well as the hazardous nature of reliance on further appreciation of debt securities i.e. on further rate cuts, make equity investment relatively more attractive. These attractions are further enhanced by the abundant liquidity supplied by central banks. On this point it is worth noting the Fed’s change of direction towards a new period of balance sheet expansion, after twenty months of normalisation (from $4.5tn in December 2017 to $3.75tn at end-August) had given it fresh room for manoeuvre.

Even so, there is as little point in predicting that the current rate regime will last, seeing it as a new paradigm, as in trying to predict the moment at which it might end. The rate on German Bunds has been negative for five consecutive months and could remain so for a while, but not for ever.

Our stock selection process and the rigorous application of our Quality & Value management approach have allowed our funds to gain ground against this background. The Rouvier Valeurs compartment is up 19.4% for the year to date (gaining 2.9% in September), with market exposure limited to 80.7%. Rouvier Évolution, which having given up systematic hedging is no longer its hedged version, gained 11.3%, with equity exposure of 43.8%. Rouvier Patrimoine, with exposure limited to 17.5%, was 3.6% higher over the first 9 months of the year. Lastly, Rouvier Europe, following a strong performance in September (up 4.1%), is up 17.7% for the year so far.



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