In turbulent equity markets, the Saemor Europe Fund logged its 15th consecutive month of positive performance in August. The long book contributed negatively as markets plunged, while the shorts contributed positively.
The long book performed better than the market as it dropped less on an unlevered basis. Stock selection was most successful in Consumer Discretionary, but less so in Banks. Our stock selection model maintained its robust performance, a balanced view across all factors once again performed well. Profitability as well as most quality factors ended in the positive.
High quality stocks outperformed on the back of rising volatility. Earnings Momentum as well as Price Momentum continued to perform well, helped by the muted macro exposures of Momentum stocks. Value was shunned across the board with Cyclical Value factors like Price-to-Book faring the worst.
China devalued its currency and is slowing down more than anticipated. Intensified concerns over the impact on global growth resulted in stock market gyrations. European stocks dropped over 5 per cent on 24 August, their biggest one-day loss since December 2008, following earlier weakness. Markets recouped some of the earlier losses toward month-end. European equities finished 7 per cent lower on the month.
Equity market volatility soared and stock-to-stock correlations rose. Most country indices were down between 7-9 per cent. Stocks in Ireland, Switzerland and UK dropped the least. Sector-wise, Diversified Financials, Materials and Automobiles were hit hardest. Defensive sectors, but also Real Estate and Industrials outperformed. The 10-year Bund yield climbed almost 30bp over the month, while Treasury and Gilt yields remained basically unchanged. Returns were negative across IG and HY credit. The broad commodity index was flat, with oil and gold up and copper down. Brent oil prices initially fell to a new post-GFC low, but rebounded sharply in the last week of August. The euro rose against the US dollar (2.0 per cent) and British pound (3.8 per cent).
In August, eurozone economic data generally surprised on the upside. The economic cycle improved and was driven by domestic demand. Money supply growth (M1 and M3) is accelerating which should be a support for the longer term. The negative effects from the continued deterioration in China and in EM in general remain limited, while US-led improvement continues. The European profit recovery is also still intact. Domestically exposed stocks and Financials now lead earnings growth. With the recent sell-off, valuation multiples came down, leaving Europe’s 12 month forward P/E at 15 times. We remain somewhat cautious in the short term given the elevated level of volatility and stick to the fine balance between Value, Momentum, Growth and Quality within our multi-factor model. This diversifies away most exposure to macro volatility. We intend to change our tactical factor allocations in the fourth quarter when seasonal effects typically pick up. November and December have historically been seasonally strong equity months.
