The month of November was marked by a historic surge in equity indices, coupled with a powerful sector rotation. We had to go back to April 2009 in Europe to find any sign of such a turnaround in the relative behaviour of the different market styles. The sudden revival of visibility due to the election of Joe Biden and the forthcoming arrival of a vaccine was the catalyst. The health crisis is now predicted to come to an end in 2021, which should allow the economic Momentum to accelerate in the near future, and the implementation of a trend favourable to cyclical stocks. Moreover, the much-feared scenario of bogging down and contestation following the US election is now behind us, and the new US administration should implement a powerful stimulus led by Janet Yellen, while renewing closer ties with its commercial partners.
In this buoyant context, the equity asset class could continue to benefit from historically attractive valuations (the risk premium of European equities +5.8% vs +5.0% on average over 20 years, in the US +3.8% vs +3.2% on average) in a context where interest rates will remain low and earnings will rebound strongly in 2021.
The Digital funds finished the month with a strong increase, but for the first time this year below their benchmarks, due to the violent style rotation observed on November 9 and 10. The arrival of the vaccine allowed for a strong rebound of stocks that were heavily impacted by the health crisis, whilst investors took their profits from the winners of the lockdown (internet stocks, health, etc.). The relative drawdown experienced was mitigated by the application, at the end of October, of our smoothing tool, which, by introducing “Value” stocks and by selling some “Covid” stocks, preserved 2.8%. The end of the month was more favourable. As trends stabilized from November 11th, the Digital Funds partially recovered this underperformance and remain well ahead of the indices since the beginning of the year. Our track record shows that while the impact of such rotation is negative in the short term, it allows then to capitalize on new trends in the longer term. The monthly performance of Digital Stars Europe Acc is +9.6%, compared to +13.9% for the MSCI Europe NR. The 2020 performance is +9.3% compared to -5.6%. Digital Stars Europe Ex-UK Acc ended November at +12.9% compared to +14% for MSCI Europe ex UK NR (+14.3% since the beginning of the year compared to -0.4%). Digital Stars Eurozone Acc achieved +11.7% compared to +17.1% for the MSCI EMU NR.
Our “momentum” signals were influenced by the mid-November sector rotation and led us to pursue the diversification of funds initiated by our smoothing tools. The rebalancings thus introduced stocks likely to benefit from a return to normal (tourism, commercial real estate, banks, cyclical stocks), whilst the model was selling health stocks (diagnostics). Digital Stars Europe remains overweight in technology and consumer discretionary; and underweight in energy, commodities and food. The fund is neutral on financials. The United Kingdom remains the biggest weight with 19.1%, ahead of Sweden 14.9% and Germany 14.8%.
Small and mid caps finished the month with a strong rise: Digital Stars Europe Smaller Companies Acc rose 13.6% in November, behind the MSCI Europe Small Cap NR which finished at 15.1%. But the fund has maintained a comfortable advance since the start of the year: 18.1% vs. -1.3% for the index. Over the month, energy (VERBIO, John Wood, SARAS) is the winning sector, followed by industrials from the construction (Eolus Vind, Morgan Sindall) and electrical equipment (NKT, Alfen) sectors. The stock va-Q-tec achieved a remarkable 84% performance this month, thanks in particular to a logistics contract linked to the new vaccine.
The latest monthly review of the portfolio clearly favoured the smaller capitalisations. The model has taken over from our smoothing tool by continuing to push the more cyclical stocks, particularly in consumer and industrial stocks, and to sell health diagnostics and media/entertainment. It is worth noting that Sweden’s weighting has been reduced in favour of Germany.
The portfolio is overweight in technology, consumer discretionary and energy, and underweight in materials. Germany (20%) is still significantly overweight, but the UK (21.3%), which is still very underweight, is once again the highest geographical weight.
Digital Stars US Equities Acc USD ended November up +10.0%, in line with the S&P 500 NR (10.9%), but behind the Russell 2000 NR (18.4%). In the absence of the energy sector (nearly 25% return) in the fund, the technology sector stood out, particularly with semiconductors (Alpha & Omega Semiconductor, Teradyne, Amkor) and software (Digital Turbine, Brightcove).
The latest monthly review of the portfolio has slightly strengthened industrials and reduced materials.
The portfolio remains overweight in consumer discretionary and industrials, and underweight in media and healthcare.
