August 2019

Political vagaries (Brexit, Hong Kong and Italy) combined with a persistently sluggish macroeconomic environment pulled down the equity markets in August: the US S&P 500 fell 1.8% and the European Stoxx 600 shed 1.6% (+16.7% and +12.4%, respectively, since the beginning of the year). The pullback reflects growing risk aversion, confirmed by the difference in behaviour between cyclical and financial stocks on the one hand, which declined between 6% and 9%, and the more defensive sectors like agrifood and pharmaceuticals on the other, which rose between 2% and 3%, and also substantiated by the decline in bond yields, with yields falling from -0.44% to -0.70% for Bunds and sliding from 1.74% to 1.50% for 10-year US Treasuries.

At a time when no data can be interpreted unequivocally, it would be very daring to boast about being able to predict the markets’ reaction to various signals. At what point, for example, will the global economic slowdown be seen as an imminent sign of recession rather than as an incentive for the central banks to lower key rates? At best we can highlight a few strong trends.
Our first observation is that the outperformance of the US market relative to its European counterpart has reached very high levels. The Merrill Lynch index which monitors this outperformance and has fluctuated between 0.9 and 1.4 since the 1950s is currently at 2.2.
Our second observation is that estimated P/E multiples are close to all-time highs for so-called defensive or blue-chip stocks (18.7x for S&P 500 consumer stocks), but are close to all-time lows for the so-called cyclical or value stocks (11.4x for S&P 500 financial stocks).
Our third observation is that the downward revision of earnings expectations due to the economic slowdown is probably over for 2019, and may have been a bit excessive as far as Europe is concerned (estimated at a little less than 2%), but it has not yet begun concerning 2020. For this reason, it is important to be both vigilant and demanding.

These trends are in keeping with the relevance of our management strategy, founded on quality AND value stock-picking (as opposed to quality OR value), which explains our deliberate European bias. This strategy has paid off for the Rouvier Sicav compartments, which have staged honourable performances since the beginning of the year. At 31 August, Rouvier Valeurs had gained 16.1% with a net equity exposure of 82.4%, Rouvier Évolution was up 10% with a net equity exposure including its derivative hedge of 45.7%, and Rouvier Patrimoine had gained 3.1% with a net equity exposure of 17.7%, fulfilling their mandates. Meanwhile Rouvier Europe continued its recovery (up 13%).

 

 

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