Our July editorial noted the renewed good health of equity markets and the caution that the levels reached by certain stocks had introduced into our thinking.
And indeed, in early October, we have seen a stagnation of indices over the third quarter, reflecting a change of trend on global markets. It has not escaped investors’ attention that the pairing of inflation and slowing monetary catalysts does little to favour continued straight-line growth in the markets and could even result in the beginning of a rotation within them. The gradual emergence from the ‘fourth wave’ of the pandemic has freed up movement for everyone and accelerated the recovery in economic activity: this is true in France, for example, where unemployment is back to its pre-pandemic level and business order books have returned to the record levels of 2000. The faster pace of recovery has made the difficulties inherent in restarting all areas of our economies at once even more noticeable: supply problems resulting from the bottlenecks that have arisen as supply chains have restarted, pressure on global shipping and shortages of semiconductors that have affected a large number of sectors. The recent surge in prices for energy and commodities more generally (particularly gas, oil and steel) is in part the result of this. The socio-economic deterioration in China has come on top of these factors, raising concerns over instability in recent weeks.
In the final analysis, therefore, global growth is entering a new phase in which the winners will perhaps not be those that came out of the pandemic ahead (sector rotation) and market potential will prove more irregular (return of volatility).
Against this background, the compartments of the Clartan SICAV are nevertheless fully invested as our positions still offer significant upside potential that could be released during this new phase. Although this strategy – Clartan’s structural approach of a good relationship between quality and price – has weakened our recent performances (with units’ gains having been less flattering than those of the indices), and you may have found this disappointing, economic conditions and the market rotation that is now taking shape provide opportunities for well-thought-through investment. Thus, in September, oil stocks (TechnipEnergies, Royal Dutch Shell, TotalEnergies) saw a return to favour on the back of sharp changes in earnings expectations. The same was true of stocks such as EasyJet and Elis, which had been hit by their ‘Covid status’ but are now regaining ground whilst still trading at substantial discounts. It was also the case for special situations such as Atos and Vivendi.
During this period when the markets are seeking a new balance, in an economic situation which is managing tensions in the face of a coming change of direction in monetary policy, our task as an investor is to analyse the longevity of the franchise, company by company, with a fair value compass.