The main event in April was obviously the French elections and their impact on the world's major economic powerhouses. Q2 started with a risk-aversion phase going into the elections but Emmanuel Macron’s win calmed the market and allowed it to focus on the improving economic landscape.
Equities did well, especially after mid-month, with European equities outperforming their US counterparts. Emerging market equities also benefited from the unwinding of the “Trump trade”, with the MSCI Emerging Markets returning 2%. Even though the economy is doing better on a global scale, rates returned between 0.05% and 0.1% for longer maturities for major developed markets. France rallied the most, -0.2%, for maturities over one year after the 1st round of the election.
The dollar continued to lose against most developed market currencies, with the cross rate against the EUR standing at 1.08 at the end of the month. Among commodities, oil remains volatile, oscillating around $50.
The HFRX Global Hedge Fund Index returned +0.24% for the month.
The market is less nervous about the election outcome since the latest results have been rather market-friendly. Nonetheless, economic uncertainty is very much present because the hard part of implementing the political agenda is starting only now. To accommodate to market evolution with the increase in passive investment and the difficulty in shorting, we have maintained our neutral stance on the strategy. The recent renormalization continues to unfold and we are progressively transitioning to more pro-cycle managers, who, we believe, are likely to be best positioned to take advantage of the possible pro-business policies expected from the new administration in the US and Europe.
Over the past quarter, stock markets in advanced countries – spurred on by expectations of fiscal stimulus and deregulation in the US and by solid incoming data – strengthened further. This optimism slightly faded towards the end of the quarter and continued into Q2 as the Trump administration had difficulties passing legislation on its new healthcare reform. Making America great again will take longer than initially thought. The outcome of the Dutch and French elections maintained market stability but the economic uncertainties remained. We believe significant shifts in asset prices will continue to occur as anticipations adjust to realities. Macro strategies will be able to capture and benefit from these wide market moves thanks to increasing volatility on rates and FX. Our Global Macro bucket may balance our net long exposure as it invests in different risk factors to our equity funds.
Quant strategies had a flatish performance in April. Momentum and Quality performed positively in Europe and the US while Value performed solidly across all regions. Long-term trend-following as well as carry trades were hurt by FX reversals. Short volatility remains a positive strategy but, overall, higher volatility would increase the number of opportunities in our quantitative bucket .
We kept our fixed income arbitrage allocation at the same level. Following the French elections, the spread between Germany and France reduced and European swap spreads returned to their December 2016 levels. Conversly, volatility on interest rates has risen slightly since then in the Euro zone.
The US Libor / OIS spread reverted to its historical lows and former price regime.
If emerging markets still offer plenty of investment opportunities across asset classes (currency, interest-rate curve, single-name equity and debt), the market has come closer to fair value after an 18-month rally. To exploit these opportunities, we have invested in global macro managers, some specialized in one given region, e.g., Asia, and in local managers that carry out fundamental analysis and make on-site company visits to pick stocks. Both Brazil and Venezuela have experienced a significant increase in volatility in recent weeks.
We are turning more positive on the strategy even if we remain mindful of the risks linked to the net long bias of event managers. The number of transactions could increase if some degree of deregulation is put in place. In such a case, large cash balances earmarked abroad by US corporations could be repatriated and possibly used for acquisitions.
Investments in European event managers that we are exploring will benefit from the need to bolt on growth.
In M&A arbitrage, we favour less static and more spread-trading-oriented managers, as average spreads among deals have compressed significantly.
We are more bullish on the distressed cycle, because of the potential increase in interest rates and the reduction in QE. So far, the energy sector, in which there has been massive issuance in recent years, has provided an attractive pool of opportunities, given the volatility of oil prices and its impact on these securities. Emerging markets may also offer opportunities due to the strength of the dollar and the hike in interest rates.
We remain cautious on the strategy, as this asset class is driven more than credit spreads by the direction of the interest rate. The quest for yield and the zero-to-negative rate environment will still provide strong support for the asset class, and delivering performance on the short side is highly challenging.