March 2018

The equity markets began 2018 with the same bullish momentum as in 2017, a very propitious year, but volatility has returned since the end of January. The US S&P 500 index first gained 7.4% through January 26 before plunging 8% through the end of March. For the Eurostoxx 600, these figures were +3.6% and -7.9%, respectively. At the end of the quarter, our two benchmark MSCI World and Europe net indices were down 3.7% and 4.3%, respectively, with March declines of 3.1% and 2%.

This renewed volatility is mainly driven by fears of a return of inflation in the United States, supported by unemployment statistics and US wage increases in late January. Volatility has since been flamed by the White House's agitation, with a flurry of conflictual nominations and brass declarations, accompanied by alarming measures to introduce protectionist tariffs. The US political environment is unlikely to ease with the approach of mid-term elections, which have rarely been fought with such vehemence. US 10-year rates slipped to 2.7% at the end of March, after peaking at 2.94% at the end of February (vs 2.46% at year-end 2017), leading some to believe that inflationary fears have eased. Yet this easing of the long end seems to be more of a reflection that investors are shifting back into  assets regarded as "risk-free".

Volatility in the most highly priced compartments was exacerbated by the fact that PE multiples at the beginning of the year were well above the long-term average, at 18.5x and 15.2x, respectively, for the US and European markets. This is illustrated by the recent equity market behaviour of GAFA (Google (Alphabet) / Amazon / Facebook / Apple), but also of Tesla and Microsoft. Investors suddenly became more wary of business models with uncertain legal frameworks, as is the case with Facebook and even Google concerning the exploitation of users' data, or very long-term profit expectations, as is the case for Amazon (valued at 235 times 2017 earnings).

Subject to change following the publication of first-quarter results, which will need to be followed closely, our meetings with companies have not called into question our favourable view of the economic environment. High valuations and renewed volatility simply call for greater vigilance in the quality of portfolio stocks, the visibility of their prospects and the rationality of their valuations.

Our "Quality & Value" management process helped limit the decline in the equity compartments of the Rouvier SICAV this quarter, with Rouvier Valeurs down 2.3% and Rouvier Europe down 3.4%. Rouvier Évolution also declined 2.3% after gaining less during the upward movement and falling less during the downturn. Rouvier Patrimoine’s total assets crossed the 400 million threshold and reported a slightly negative performance of 0.4%.

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