Unsurprisingly, the European Central Bank (ECB) kept rates unchanged at its latest meeting. Given the good news on inflation, the ECB has no doubt turned its attention to the economy. The latest macroeconomic readings suggest that growth will continue to slow, with PMIs falling once again in October.
Gold prices continued to climb towards the USD 2,000 mark and are now nearing their all-time high of USD 2,075, reached in summer 2020. Prices are being pushed up by geopolitical concerns in the Middle East, despite headwinds from rising interest rates. We are maintaining our exposure to gold – any lasting change in course will depend on interest rates.
A number of renewable energy companies active in solar and wind power and electric vehicles have had to lower their growth forecasts this earnings season because production costs have been driven up by rising interest rates and inflation. However, according to a recent report by the International Energy Agency, demand for low-carbon solutions should remain intact in the years to come.
The stock market correction continues
Stock markets are in the doldrums once again, despite a good start to the year. Until late July, major stock market indexes rallied sharply, making up for some of their losses in 2022. But things have changed drastically since early August. What first appeared to be a welcome consolidation turned out to be quite a harsh correction that wiped out much of the year’s gains on both US and European indexes, with the main Swiss index even losing ground so far this year.
So should we be worried about this stock market decline? The reasons for the recent selloff are the subject of much debate. The geopolitical context is, of course, one factor. The war in Ukraine is dragging on, and now there are also concerns about the Middle East. From an economic standpoint, it’s energy prices that are most likely to be affected, although for the moment the conflict hasn’t caused oil prices to spike. Equity markets are also being weighed down by rising bond yields. That’s particularly true in the US, where 10-year Treasury yields are close to 5%, putting them on a par with returns on equities.
Despite some soft patches, particularly in Europe and China, the global economy is holding up pretty well, with the US economy showing remarkable resilience. Buoyed by consumer spending, US Q3 growth came in at almost 5% on an annualised basis, defying many economists’ recent recessionary forecasts.
And leading indicators are still steering in the right direction for the months ahead – the PMI in particular is pointing to an upcoming improvement in the manufacturing sector. US corporate earnings continue to be boosted by this resilience. Economic fundamentals are reassuring, stock market valuations are reasonable, investors are very bearish and we’re heading into a period of the year that is usually good for stocks – these are all reasons to believe that the market correction is far along and will soon come to an end.
Hedge funds are holding up well
The third quarter was tough for the financial markets as soaring yields helped to push equity indexes down by 4%. Despite this trend, alternative funds on average gained around 0.7% over the period.
Credit funds fared better as credit spreads narrowed, offsetting the negative impact of rising rates. Systematic strategies – including both statistical arbitrage and trend-based strategies – also delivered positive returns over the quarter.
Event-driven funds rebounded after a difficult second quarter. Regulatory concerns were resolved more quickly than expected, which meant spreads on upcoming mergers and acquisitions narrowed quickly.
Unsurprisingly, long/short equity strategies put in the worst performance. They were dragged down by their long bias but managed to generate alpha, which limited the negative impact from the underlying markets. Dispersion in this segment remained low. Value managers were the only ones to outperform in the current environment. Rising government bond yields weighed on bond arbitrage strategies, as well as on macro managers, who were unable to tap into the uptick in volatility.
We think hedge funds will maintain their appeal, as rising volatility means there are now more opportunities. These funds will also continue to offer attractive asymmetric returns, delivering more upside than downside participation.
Author
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Daniel Varela holds a degree in business administration with a specialisation in finance from the University of Geneva and began his career in 1989 as a fixed income manager. He joined Banque Piguet & Cie in 1999 as head of institutional asset management and with responsibility for bond analysis and management. In 2011, he became head of the investment strategy and Piguet Galland's investment department. In 2012, he joined Piguet Galland's Executive Committee as CIO.
