To all outward appearances, global financial markets remained unperturbed in the face of potentially disruptive political factors in the second quarter. The S&P500 index in the US was up 3% over the quarter (0.5% in June) and the European Stoxx600 gained 2.4% (-0.8% in June). Markets received support from an oil sector gaining traction as oil prices rose above $70/barrel (with the oil sector up 14.7% in the Stoxx 600 and 17% in the S&P). However, other sectors, such as the European automotive industry, which are dependent in large part on exports to the USA, saw a correction of nearly 13%.
The absence of an overall reaction shows the limited importance the market has placed on the volleys of political invective flying across the Atlantic, just so long as they do not threaten the scenario of healthy global growth, as underlined by the results and guidance published by companies at the end of the first quarter and confirmed, for our part, during our meetings with companies. The same was not true at the end of January, when risks of overheating in the US economy caused fears of a hike in interest rates, which would threaten growth, and triggered a market correction of 10%. Nor is it likely to be true over the coming months if the price of oil ($74/barrel at end-June, up 23% over the year) climbs rapidly due to the US embargo on Iran and the situation in Venezuela. Vigilance, a demanding approach to quality and close attention to valuation remain our management watchwords in such circumstances.
As far as interest rates are concerned, normalisation is taking place in an orderly fashion for the US 10-year rate: 2.85% at end-June, from 2.41% at end-December 2017 and a high of 3.11% in May. The normalisation of the 10-year Bund has, however, marked a pause, as it epitomises the safe haven investment. Having reached 0.76% in February, the 10-year rate is currently below its level at the end of 2017 (0.31%, from 0.42%). The interest rate differential between the USA and Europe has resulted in an easing in the upward pressure on the euro ($1.17/€, from 1.25 in February and 1.20 at end-2017), which will help European exporters.
Compared with a European MSCI index, with dividends reinvested, that is slightly down since the start of the year (-0.5%), the Rouvier Valeurs compartment is virtually stable at -0.1% (+2.3% in the second quarter, -1.2% in June), whilst Rouvier Europe is down 4.8% (-1.5% in the second quarter and -2% in June). Two favourable factors explain the more defensive nature of Rouvier Valeurs against this background: its high-quality positioning and focus on companies with strong visibility on the one hand, and its equity exposure of just 81.5% on the other (explained in turn by the level of certain valuations). By contrast Rouvier Europe did not benefit from its positions in stocks with low valuations, particularly those in European industrial companies, which suffered from concerns over mounting protectionism and a possible slowdown in economic growth. Financial stocks suffered a correction following the cautious announcements from the ECB in mid-June signalling that although it will cease the expansion of its balance sheet via asset purchases at the end of 2018, it will not change policy rates until the end of the summer of 2019 at the earliest. In the short term, this cooled expectations of an increase in European interest rates.
Rouvier Évolution is down 1.7% due to the cost of its systematic hedging, although the advantages of this protection were demonstrated again during the market volatility of the first quarter.
Lastly, Rouvier Patrimoine is managing its core bond portfolio with a focus on limiting risk against a background of rising rates. This safety-first approach also applies to its equity component, with exposure limited to 18%. Overall, the compartment was down 0.5% over the first half, an identical performance to its bond market benchmark.