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Cartesio September 2019 commentary

Fecha de publicación 08 de octubre de 2019

Llevamos ocho años enviando un comentario mensual en inglés a los clientes institucionales que siguen nuestros fondos en Luxemburgo (réplicas de los domiciliados en España). Los clientes nos llevan diciendo tiempo que encuentran el comentario útil y, suponemos, algo más entretenido que el comentario de las fichas mensuales donde, por razones de espacio, el comentario es necesariamente más breve y menos elaborado. El inglés es el latín de nuestra época y en el mundo financiero es, a efectos prácticos, la lengua vehicular.

A partir de ahora reproduciremos en este blog el comentario que hacemos en inglés todos los meses. Esperamos que esta publicación les ayude a entender mejor nuestro proceso de inversión y los movimientos que hacemos en los fondos. Cualquier comentario o pregunta será siempre bien recibido.

Dear Investor,

Pareturn Cartesio Income (PCI) is up 0.82% in September and up 2.12% YTD. Pareturn Cartesio Equity (PCE) is up 2.1% in September and up 4.66% YTD. Since inception (March 2004), Cartesio X (replicated by PCI) is up 85% (4.06% p.a.) with a volatility of 3.1%; Cartesio Y (replicated by PCE) is up 125% (5.4% p.a.) with a volatility of 9.4%. Both funds have outperformed their benchmarks in risk adjusted terms since inception (March 2004).

As always, we enclose the factsheets (September 2019) of both funds and a pdf file showing the best and worst equity performers of the fund in the month.

Chronicle of a recession foretold?…

September has taken European equities to a new high for the year and bond yields had the temerity of inching upwards. The most interesting market action took place during the first half when there was a strong rotation from growth to value accompanied by a significant (by today´s standards) pick up in long term interest rates. The funds have done reasonably well in this scenario, particularly during the rotation earlier in the month.

During the first week in October recession fears took hold and European equities gave up the gains made in September. We cannot but note the self-confidence of economists and market commentators forecasting an imminent recession. As bond yields have plummeted, central banks made U turns and leading indicators point downwards, the voices forecasting a recession are deafening. The pricing in bond markets and the more economically sensitive sectors is also very vocal about the economic risks going forward.

Do we not see or share some of the doomsayer´s concerns? Of course, we do. A very long economic cycle fuelled and supported by the cheapest debt in history is enough to put the fear of God in anyone. If we add trade wars, Brexit and a vulnerable Chinese economy then the backdrop becomes even more uncertain. The problem in this narrative, as always, is price and positioning. The bond market is discounting Japan forever in Europe. Banks, autos, oils, miners are priced for recession or worse. You can only buy quality and growth, the price is seen increasingly as irrelevant. In the land of magical realism, the future has been foretold with clinical precision.

What if bond prices are the result of hyper active central banks which confuse low but stable inflation with deflation? What if the leading indicators turn on the back of a favourable outcome for trade wars and Brexit? What if weakness in the manufacturing sector does not spill over to the services sector as feared because fiscal policy and the service sector more than compensate? What if debt monetisation and MMT are for real, inflation picks up and bonds are wiped out? What if drum-tight labour markets produce wage increases? What if the technological revolution and quest for cleaner energy is not only disruptive but growth and productivity enhancing?

Our equity portfolio is up 12% YTD vs 19% for MSCI Pan Europe. This underperformance is explained by no exposure to consumer staples (the sector explains 25% of the rise of the market YTD), a cyclical bias and some defensives (Centrica, Takeda and Fresenius SE) which have underperformed their sector. On a brighter note, the portfolio has not underperformed significantly since the end of May despite a darkening economic outlook. The short position in bonds/bonos had a negative contribution of 0.73% in PCI YTD. If the chronicle of the recession foretold unfolds differently, brighter times loom ahead.

Madrid 30th September 2019