If anything has improved over the last years, it has been our ability to capture market rallies. We’ve been worrying about falling markets our entire lives, but what we really need to do is focus on being in the market when it’s on the rise. Investments do entail risks, but we must overcome our fears and not give up on them; the only alternative is a certain loss.
SFRR ends October at +5.18% (+12.21% YTD), SFPG at +5.66% (+20.67% YTD) and SFQS posts MTD returns of +6.52% (+27.05% YTD), while the MSCI World closes the month at 5.88% in EUR (+25.03% YTD in EUR).
SF Real Return and SF Prudent Growth’s positive returns were secured thanks to our continuing to back the fastest growing companies, while keeping futures hedging levels at 60% –tactically lowered to 41 and 47% using options–. In SF Quality Stock, where investments remain unhedged, this month’s outstanding performance is the result of our rotation towards the most attractive companies in terms of quality and growth. Hedges not only help us to mitigate losses in times of crises, but also allow us to capture positive returns from other sources, such as, volatility and regional indices dispersion. Our flexibility in managing investments and our daily monitoring of the markets, enable us to offer both growth and protection to our Funds and portfolios.
In October, just when the inflation “war drums” were sounding the loudest, markets rallied the most. Indeed, although inflation is positive for equities, intervention by central banks to cool the economy, or a rampant inflation –that can end up suffocating the management of companies– can also be negative for markets.
Inflation is “positive” when prices rise: consumers anticipate their purchases because they will have to pay more for them in the future, while companies multiply investments as they expect to sell more at higher prices, increasing their margins and allowing them to innovate and to continue to grow. This is the so called “virtuous” economic cycle.
Inflation is “negative” when cash payments are not an option because currency has devaluated so fast that it loses its safe-haven properties, it distorts production processes, paralyzes companies, and make imports unfeasible. This is the “vicious” cycle. To avoid this, central banks prefer cooling the economy to gradually slow down growth.
In this backdrop, the key is not whether there will be inflation or not, but if it will be of the positive or negative kind. If it turns out to be of the positive kind, long exposure to equity markets is a must; if it is of the negative kind, our stance should be more neutral.
All things considered, the logical conclusion is to believe that today’s inflation is of the positive variety; if and when it changes, we’ll be quick to react, but for the time being it costs more to be out of the market than to be in it.
An inflation rate of 4% –even if it is considered temporary– translates into a loss in purchasing power of around 20% over 5 years. This is a situation that few can endure, and that is why equity rallies are to be expected: the assets that will rise will be those that are still valuable for investors. Bonds –already expensive– will fall as inflation rises; real estate returns are already below inflation, and the only investments that seem capable of putting up a front against inflation are equities, commodities and energy. However, these last two are so volatile and so vulnerable to government intervention that the only option left is investing in equities. Equity investments do entail volatility, but companies continue to post gains and to announce better than expected revenue projections.
The world innovates, the world produces, and the world’s gains are distributed through the equity markets, and that is why the whole world loves them.
The main question isn’t if we should recommend investments in equity or not, depending on the investor’s profile: the answer in all cases is definitively yes. The true challenge is finding the hedging strategy that fits each investor best, that will allow them to continue to invest while controlling the volatility of their portfolios. This is our main focus with novel investors or with investors that have already exhausted the fixed income and real estate markets as an alternative for their investments.