Carmignac Absolute Return Europe

August was a month of extreme volatility, sharp rotation seeing global equities falling sharply in the first few days of the month only to rally back by the end of the month.

A toxic combination of weaker US data and a spike in the Japanese Yen following an interest rate rise in Japan set of a spectacular chain of events which forced systematic funds to unwind their highly leveraged Yen carry trade creating a significant global equity degrossing with long positions forcibly liquidated and the covering of short positions.

The VIX volatility risk indicator was propelled to a level above 60, a level only seen 3 times in the last 35 years, the only other times being the 2008 GFC and the Covid sell off in March 2020.

Over the month Europe outperformed the US. The rotational forces (sectors) that had already started at end of July, accelerated in August, seeing Tech, cyclicals give way to more defensive sectors leading the rebound rally.

Defensives outperformed cyclicals and with sharply lower bond yields , bond proxies had a strong month.

Within Europe the best performing sectors were Retail Telecoms and insurance while the main laggards were Basic resources, Energy, Banks and Technology.

In some of the most challenging conditions we have had to work with, the performance of the Fund was negative. This was mainly driven by the rotation and or core longs in Tech and GLP1 pharma names, lagging the rest of the market.

Positive contributions were made in telecoms and real estate while almost all other sector returns were either flat or down a few base points due to the rotational effect of the degrossing.

This meant that over the month the returns from our longs and shorts in each sector basically cancelled each other out. The exception to this were Technology and Financials which were the largest detractors.

The key winners from stock selection were:

Deutsche Telekom Long: Earnings beat and free cash flow guidance raised

Meta Platform Long: Bounce back after July sell off.

Luxury short: Negative consumer sentiment.

Schneider Electric Long: Market sell off provided buying opportunity for high quality company

Vonovia Long: Strong operating results , beneficiary of lower interest rates.

The principal laggards were:

Amazon Long: Q3 guidance disappointed a bullish consensus

Alphabet Long: Antitrust ruling on Google search.

DOF Long: Profit taking after strong run

ASML Long: Cautious sentiment towards AI beneficiaries

TGS Long: Negative commentary from industry peer

Faced with negative market conditions in the first few days of the month we rapidly moved into capital protection mode to minimize risk of losses.

Our gross exposure was reduced to around 100 from 120 and within the portfolio structure we reduced Technology, cyclicals and financials and added to defensive names in Communications, Staples and Real Estate.

With markets at the lows we took advantage of selective opportunities to pick up oversold quality names such as Schneider which worked well.

With no earnings reports, the market will be mostly focused on macro and political (US election) news, usually a cause for added uncertainty and volatility.

Therefore, all eyes on this week’s employment numbers (NFP). A weak print, with rising unemployment, would fuel the hard landing / recession scenario, whereby even a more aggressive Fed cut, is unlikely to be supportive to the markets, putting more pressure on Cyclicals to underperform Defensive sectors.

If however, we do see a good NFP number (unemployment not rising), there will be a sign of relief from the market (especially from these lower starting levels), as good employment levels no longer equate to higher inflation.

Also, we are soon upon the US elections. History suggests, especially if it’s a tight race between the 2 presidential candidates, that some 4-6 weeks before the election, markets tend be weak, selling off between 3-5% on average.

Therefore, considering all these data points, uncertainties, coupled with it already being a seasonally weaker period for markets, we continue to run with reduced risk, lower gross and net so that we have plenty of ‘ammunition’ to step in again and scale up our highest conviction ideas once there is a clearer picture.