Stagflation increasingly likely?

Apart from the expected gradual recovery of economic activity, contributing to the upside price pressures is the import ban for seaborne Russian crude shipments that the EU has agreed upon following protracted rounds of negotiations among member states. However, the most acute shortages remain in the refined products space with diesel (heating oil) in particular short supply. Industrial metals, on the other hand, at the sector level have given back all their accrued price gains since the start of the year. The collapse of import demand from China has mitigated tail risks for supply in conjunction with the war in Ukraine materially for the time being. Despite sustained high energy costs, aluminium prices suffered the most in May. Precious metals tended weaker as well. Particularly hard hit was silver given its predominantly industrial usage pattern. But gold prices suffered as well despite growing concerns over the prospect of recession as long-term real yields continued to strengthen.

Picard Angst All Commodity Tracker Plus above basic strategy

Nonetheless, broad commodity benchmarks mostly advanced through May. Primary beneficiaries were particularly energy-heavy indices such as the S&P GSCI Commodity TR (+5.07%), while more broadly diversified strategies such as the Bloomberg Commodity TR index (+2.22%) recorded modest gains. Our own PACI strategy ended the month marginally weaker (-0.32*%) trailing the Bloomberg benchmark. For the most part, the underperformance was attributable to the significantly lower energy footprint of the portfolio while high exposure to precious metals with an overweight in silver posed an additional headwind. With a return of 0.16%, the Picard Angst All Commodity Tracker Plus (share class D) outperformed the base strategy as the supplemental adaptive roll and contract maturity selection overlay provided an additional positive return contribution in the grains sector.

Picard Angst Energy & Metals Fund still in positive territory

Strategies that exclude agricultural commodities fared better than the broad benchmarks in May. Among the most energy-heavy strategies, the S&P GSCI Energy & Metals TR index added +7.13%. Our own Picard Angst Energy & Metals strategy gained +2.22% failing to keep pace with the benchmark Bloomberg Commodity ex-Ag ex-LS TR index (+3.25%). The underperformance was attributable to the more even sector allocation which detracted from return given weakness in both industrial and precious metals. The Picard Angst Energy & Metals fund with a return of +1.38% (share class D in USD) ended slightly behind the base strategy as the adaptive roll and contract maturity selection overlay provided a negative return contribution.

In May, the reserve bank of India (RBI) announced an off-cycle hike in the benchmark interest rate of 40 bps to 4.4% and the cash reserve ratio of 50 bps to 4%. The RBI has advanced the monetary policy decision by one month to prevent inflationary expectations in an increasingly volatile and uncertain environment. Following the RBI’s tightening, the government of India announced reduction on fuel taxes and custom duties for raw materials of plastics and steel. India steered the fiscal stimulus during the pandemic to address the supply side constraints rather than igniting the demand. At present, the country is balancing the demand and supply side measures to curb the inflation. When the inflation is driven by the supply shortage escalation, raising interest rate alone will not bring down the price inflation, unless combined with tax reductions and other supply side interventions.

Largest IPO in the Indian market

The Life Insurance Corporation (LIC) of India was listed on May 17th, the largest IPO to list in the domestic market. The issue was oversubscribed by 2.95 times, the bids were placed by the employees and policy holders of LIC, domestic mutual funds, and global sovereign funds. The government of India raised USD 2.7 billion by selling 3.5% stake in the company. LIC is the largest insurance company in India with two thousand branches across India and more than 250 million policy holders. The company has over USD 500 billion in assets and 100’000 employees.

Strong quarterly results from Indian companiest

Roughly 2’900 companies have posted their Q4FY22 results by end of May. Overall sales revenue and net profit were up by 26% and 27% year-on-year. While the higher sales growth can be attributed to the price hikes, thanks to the companies’ ability to transfer the higher input costs to consumers, the surge in overall net profit of Indian corporate was led by metals and upstream oil companies. However, the escalation of input cost on the back of sudden increase in commodity prices has taken its toll on gross margins. Infrastructure investments, boost in exports, digital infrastructure, booming real estate market, renewable energy push and local ownership of defence manufacturing will encourage the next leg of earning growth, provided inflation remains under control.

Weak month for the Padma India Fund

The Padma India fund was down -5.49% this month. Excluding consumer staples and energy sectors, all other sectors were in the red zone. Foreign investors have been sellers of developing and emerging markets including India since October last year. Nevertheless, the Indian equity market was holding quite well thanks to the strong inflows from domestic investors. In the last couple of months, boom in the real estate market and the LIC IPO have deviated the domestic flows from equities leaving the indices bearing the brunt of foreign investors selling. The Small and Mid-Cap Composite Index tanked -9.25%, while the Nifty 50 Index corrected -4.38% (all in USD terms). Dixon Technologies and TCI Express were the major laggards, while Britannia Industries and Fine Organic Industries were the best performers this month. Most of the portfolio companies have announced stellar set of results, however owning to the weak market sentiment the prices have contracted.

Uncertainties regarding the geopolitical situation and the economic impact of recent developments persist. The growth rates for the world economy were reduced again for this year and for next year. The risk of a recession in certain regions or stagflation remains above average. In particular, the renewed supply bottlenecks, triggered by drastic measures to combat the pandemic in Asia, are having a negative impact on the further development.

Despite the waning confidence of companies and consumers, the leading indicators do not point to a weakening. The willingness to invest remained high and consumer sentiment was also supported by the strong labour market. The service sector in particular proved to be robust.

Expectations regarding inflation dynamics did not rise any further either. The consensus currently seems to be that inflation data has peaked or is about to peak and inflation is slowly unwinding.

The effects of the monetary policy adjustment and the increased probability of a significant slowdown in growth are reflected in the flat yield curve. However, no further inversion could be observed, which currently implies that a hard landing is expected to be prevented.

The central banks are also sticking to a further restrictive monetary policy and are of the opinion that additional interest rate hikes are necessary. In America, two large interest rate hikes of 0.5% each are currently expected and then a slowdown in interest rate adjustments in autumn. In Europe, too, there was a clear signal that interest rate hikes would begin in the third quarter.

The financial markets will therefore continue to be shaped by the adjustments to monetary policy and the effects of price increases and delivery bottlenecks. Visibility thus also remains limited.

The company's results for the first quarter met or exceeded analysts' expectations and did not lead to a reduction in earnings expectations for the full year. As a result of the price corrections since the beginning of the year, the valuation of equities fell and once again corresponds to the long-term average.

Strategic Allocation Fund in the red

While a clear trend reversal with respect to inflationary pressures remains elusive, bond markets seems to have turned the page already and have begun to focus instead on the prospect of a pronounced growth slowdown if not recession. Meanwhile, equities continue to be weighed down by negative investor sentiment. However, with sentiment reaching extremes, the latter half of May saw a significant part of the losses recouped.

The Strategic Allocation Fund ended the month of April with a loss of -2.28% (ytd -7.65%, share class C EUR).

While bond markets had spent April in the grasp of the spectre of ever-rising inflation resulting in a pronounced rise of yields across the maturity spectrum as expectations escalated of the amount of central bank tightening required, May opened a new chapter with bonds seemingly focused on diminishing growth prospects to the exclusion of everything else. In Europe, in particular, against the backdrop of an intractable energy crisis scenarios of recession are moving to the forefront. However, near-term growth prospects remain unclear not only given the disruptive effects of the zero Covid strategy pursued in China but also in light of disparate factors shaping the composition of consumption. While demand for durable goods keeps weakening, consumers’ post-pandemic turn towards services is boosting activity in other sectors of the economy.

Against this backdrop, the rise of yields has begun to stall at the long end of the curve. At the same time, however, concerns regarding the credit worthiness of companies are increasing boosting credit spreads for both investment grade as well as high yield issuers. In light of these developments, return contributions from fixed income allocations achieved by our managers have been negative on average in May.

Equities continued where they had left off in April and exhibited continued broad-based weakness into May. Selling remained concentrated in the most highly valued and most growth-centric sectors. Consequently, US equity markets significantly underperformed their European, Asian and emerging market peers. However, as investor pessimism reached extremes with hedging activity escalating, a technical recovery ensued recouping a large part of the month’s losses. Nonetheless, the outlook for equities remains challenging. While valuations have come down substantially, expectations for corporate earnings and margins have not been revised downwards despite the deteriorating macroeconomic outlook. On the contrary, earnings estimate for the S&P 500 have increased to more than 10% since the start of the year while European earnings growth is expected to be even stronger at 12%.

Stabilised European Dividend Income Fund remains stable

The European stock market ended the reporting month with a price increase of +0.9% and thus had a higher return than the world stock markets.

The defensive alignment of the strategy with a focus on more stable development also led to a positive result for the fund in the month under review. The result was a performance of +0.1%.

At the beginning of the month, various positions were reduced (Danone, Swisscom, Airbus) or reallocated within the sector after strong price gains. Rio Tinto and Roche were added, while the allocation to Novartis was reduced.

The more defensive orientation is retained, part of the market risks are hedged using index options.