August 2017 Flash Commentary
Areca Value Discovery continued its upward trend in August despite weak equity markets, with the S&P 500 down -0.5% and the EuroStoxx down -1.3%. This result is particularly encouraging for two important reasons: First, we have immunized our portfolio away from quality-focused relative-value exposures underperforming in this period of indiscriminate yield-seeking momentum bouts, when poorer quality outperforms. Second, we achieved this without compromising our long-term relative-value opportunities on quality, paramount for any eventual market unwind. Be sure of one thing: when a flight-to-quality correction comes, one must be holding high-quality assets.
August brought rising tensions between North Korea and the US with a surprisingly moderate impact on risk-asset classes. High yield bonds dropped with equity markets only to partially recover in the last two days of the month, ending moderately down. After double digit returns in 2016 and a very strong first half in 2017, the high-yield run is slowing down. Twice the usual daily volume was traded in investment grade credit indices: investors rotated their exposures, taking the threat seriously.
Notably, under the moderate calmness of the market’s surface (represented by the index performance), the relative perception of market risk had a more violent adjustment: August witnessed a severe underperformance of companies with weak balance sheets. Furthermore, government bonds enjoyed the strongest rally since US election. All these short-term trends are clear signs of an increasing lack of confidence in the US economy.