February was a generally positive month for the markets (S&P 500 +2.61%, Euro Stoxx 50 +1.60%), but behind these rising figures there are strong disparities among sectors. In fact, the most cyclical sectors have boomed back and posted the best performances, while sectors that have been most resilient in 2020 have suffered more.
This sectoral rotation occurred for some specific reasons, such as the acceleration of the distribution of vaccines against Covid-19, particularly in the United States, which is leading to profit taking on resistant stocks, as well as the rise in interest rates across the curve, both in euro and dollar.
Thus, the benchmark rate for the ten-year US Treasury bond rose during the month from 1.07% to 1.41%, a movement of extraordinary significance for one of the most liquid market (the US Treasury bonds) in the world.
What lies behind this movement?
There appears to be a concensus towards an anticipation of a resurgence of inflation, in the wake of the situation regarding the pandemic coming under control which is expected for the second half of 2021, and also in view of the expansionary monetary and fiscal policies in place in all developed countries.
We can only be dubious about these explanations and are inclined to believe that this is a simple sectoral rotation, as it often happens in the markets, boosted by the hope of a rebound in stocks that have been lagging behind.
As for the rise in rates, it would seem that this is, in any case, partly due to purely technical conditions. Indeed, the possible end of an exception, put in place during the pandemic, for US banks not to have to hold liquidity reserves against their investments in treasury bills, already seems to have had an impact on bond prices and consequently on their yields.
In any case, we believe that the occurrence of inflation is far too widely anticipated and that it will take a considerable time to materialise. Indeed, the 2009-2019 decade has clearly demonstrated that an expansionary monetary policy (such as that pursued by the US Federal Reserve, the European Central Bank or the Swiss National Bank) had virtually no impact on inflation.
Financial markets did perform well during the same period, but share prices only followed the growth of corporate profits and not a hypothetical inflation. The difference between the 2009-2019 decade and today is that fiscal policies were restrictive then but not now.
A large-scale expansionary fiscal policy could therefore be a game-changer for inflation, but we believe that such policies will require time to take effect and that, as long as unemployment rates remain at high levels, as they are today, it is impossible to have large-scale price increases leading to inflation.
The aftermath of January's volatility is, however, still present and the markets are still witnessing speculative movements. It seems that companies that cannot generate profits in the short or even medium term but have strong growth potential (usually in the technology sector) have entered a correction phase after an extremely positive end to 2020.
We are not exposed to this type of company, but it is possible that some of our investments, particularly in the technology sector, may experience a few turbulent months amidst these reallocations.
Using an analogy that you may have heard us use before, investing is like the Tour de France: you don't have to win all the stages to win the Tour. It's about being as consistent as possible over time.
In view of this analysis, there is no significant reason to make any major changes to our investments, despite the diverse performances of our funds: -1.02% for FFM European Selection, and +5.78% for FFM American Growth over the month.
Fisconsult Fund Management
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