Equity indices retreated in September (MSCI Europe NR -1.6%, MSCI USA NR -4.7%), due to pressure on interest rates. The US 10-year sovereign yield reached 4.57% (vs. 4.10% at the end of August) and the German 3.84% (vs. 3.47%). Such levels had not been reached since 2007 in the US and 2011 in Germany, respectively. The cause of this brutal tension was the Fed, who took a surprisingly restrictive stance at its September meeting, and significantly toned down its rate cut projections for 2024. This dampened investors’ enthusiasm. However, the significance of this event should not be overestimated. Communication is an integral part of monetary policy, and the priority remains the fight against inflation, despite a trajectory that has been moving in the right direction since the summer 2022. It would not be surprising to see a shift in policy soon by central banks, which have no incentive to trigger a severe recession. In an environment dominated by negative news (rising oil prices, the beginnings of a US recession, a sluggish Chinese economy and restrictive rhetoric from central bankers), the slightest piece of good news could support the equity asset class, whose valuation remains attractive (particularly in Europe), and in our view already anticipates a moderate recession. In this respect, the quarterly publications due to start soon will be particularly closely watched.
The sharp rise in bond yields benefited banks (BPER, Jyske Bank), our main sector bet. The surge in oil prices was reflected in our energy-related stocks (TORM, Shoeller-Bleckmann, Technip Energies). But the rising yields have affected the equity markets in general, and small caps and growth stocks in particular, which are well represented in our portfolios. Against this backdrop, the Digital Stars funds ended the month down compared with their indices. Digital Stars Europe Acc posted a monthly performance of -2.8% compared with -1.6% for the MSCI Europe NR. Digital Stars Continental Europe Acc ended September at -2.9% compared with -2.5% for the MSCI Europe ex UK NR. Digital Stars Eurozone Acc posted a monthly performance of -4.0% compared with -3.2% for the MSCI EMU NR.
The rebalancings carried out in September were diversified, increasing our positions in the energy, construction materials and telecommunications sectors. Among the exits were IT and consumer discretionary stocks. The overweight of banking stocks in Digital Stars Europe is now at 5.0%.
Digital Stars Europe is also overweight financials and industrials. The fund is underweight healthcare and consumer staples. The UK is still the fund’s top weight at 19.4%, ahead of Italy at 15.1% (largest overweight) and Germany at 12.5%.
Digital Stars Europe Smaller Companies Acc ended down -3.3% in September, slightly behind the MSCI Europe Small Cap NR at -3.1%. Consumer discretionary was a drag on the fund (Jumbo, Dunelm), particularly the automotive sector (Piaggio, Aston Martin Lagonda). But the energy sector held up well (Okeanis Eco Tankers, Technip Energies).
The monthly portfolio reviews have strengthened our positions in the real estate sector, as well as in the energy and telecommunications. Sales were mainly in IT and consume staples, as well as in health care.
The portfolio is still mainly overweight in consumer discretionary, as well as in consumer staples, and significantly underweight in real estate.
The United Kingdom is the biggest country weight in the portfolio and weighs 23.2% (but remains the most largely underweight country), ahead of Italy at 12.3%. Greece is still the most overweight country at 8.5%.
Digital Stars US Equities Acc USD was down -6.0% in September, underperforming the MSCI USA NR at -4.7% and the MSCI USA Small Cap NR at -5.8%. The market drop particularly affected growth and cyclical stocks in the technology (semiconductors), consumer discretionary and industrial sectors.
The latest monthly portfolio review mainly increased the positions in the industry, and reduced those in the financial sector.
The portfolio is overweight in industry and consumer discretionary. Media is still the biggest underweight, before finance and pharmaceuticals.
