Income Generation / Total Return
7% p.a., net of fees
30 April 2020
Following the technical rebound observed in risky assets in October, the momentum in equity markets persisted last month with indices reverting to their summer levels. However, EZ and EM equities outperformed significantly in November, with the Euro Stoxx 50 even erasing most of its annual losses. By contrast, US and EM equities still suffer heavy double-digit losses for the year 2022.
Once again, investors were encouraged by the shift in the Fed’s monetary policy and the US inflation-related news flow. On top of inflation indicators showing that their peak had been reached in Q3, the US economy showed signs of a rather moderate slowdown. A US recession is still priced-in at a low level and the soft landing remains the base scenario for 2023. Within this optimistic macro environment, the Fed’s dovish pivot in its rate guidance became widely expected, resulting in lowering the Fed’s rate hike expectations for 2023 with probably a terminal hike at the February FOMC. In this new goldilocks' configuration, US Treasury yields continued their decline fuelling the selloff in the USD and triggering the drop in equity volatilities, as risk aversion started to recede. Although remaining restrictive, the softening in US monetary conditions supported equity markets in general, with investors not willing to look at the mounting risks on worldwide activity in 2023.
The slowdown in both global activity and inflation puts at risk equity earnings and could shortly lead to heavier downgrades in forecasts for FY2023. In 2022, EZ equities earnings were massively supported by the EUR devaluation and the outperformance of the energy sector, factors no longer expected in 2023. US earnings were only supported by strong revenues due to a buoyant domestic demand, while margins were already squeezed in Q3 2022. Now that equity markets are back again in overvaluation territory, their performance outlook is increasingly tilted to the downside for Q1 2023.
The Fund’s performance continued its positive trend, supported by the drop in equity volatilities and bond yields. The short maturity of the book of volatility-income notes and its hefty residual protection, resulted in completely recovering the minor mark-to-market losses present at the end of October, in addition to the monthly running income. In terms of risk management, the Fund’s beta to the S&P500 declined naturally to its lowest level this year. Going forward, it was decided to reinvest partially recent expiries, holding a cash position in the anticipation of a surge in equity volatilities early 2023.