Elkstone Investment Services Monthly Bulletin

Investment Services October 2019


Paul Gorman, Portfolio Manager


Equity markets were strong in September with a “risk-on” market rotation leading to a significant change in style and sector leadership.

Paul Gorman is Chief Investment Officer at Elkstone Private


The Market – Latest Dynamics 

Following the Labour Day weekend at the start of September, a generally more positive re-assessment of the outlook for US growth produced a distinctly more aggressive risk sentiment. The immediate impact was felt in the bond market with a significant sell-off partly reversing the extreme yield declines seen in August. Bond markets regained composure mid-month following the latest interest rate reduction by the Fed, and US 10y yields declined to close the month at 1.7%. In this more benign environment, equity markets were generally stronger with the S&P 500 +1.7%, Eurostoxx 50 +4.2%, Topix +5% and MSCI Asia Pacific +2.1%. However, as outlined below, within the equity markets there was a very significant “risk-on” rotation in market leadership with the previously depressed Value/Cyclicals preferred to Growth/Defensive styles and the up-to-now lagging sectors recovering strongly relative to those that had driven the market YTD. Currency markets were largely unchanged over the month with the exception of GBP which strengthened 1.9% versus the Euro as parliamentary outcomes diminished (or delayed) the most-feared Brexit outcomes.

Market Performance Returns – EUR (€) Denominated
Name Year to Date
Trailing 30D
September Return FY 2018
EUR (€) EUR (€) EUR (€) EUR (€)
Elkstone Global Equity Strategy +23.69% (0.13%) (0.13%) +1.16%
db x-trackers MSCI AC World ETF +22.46% +3.22% +3.22% (6.20%)
U.S. – S&P 500 +24.72% +2.51% +2.51% (6.24%)
Europe – Eurostoxx 600 +16.44% +3.60% +3.60% (13.24%)
Gold +20.79% (2.40%) (2.40%) +3.11%
WTI Crude Oil +25.07% (1.10%) (1.10%) (24.84%)
Source: Bloomberg, 30th September 2019
Elkstone Global Equity Strategy

During September, the Strategy lost -0.13% compared to a representative global equity index +3.22%. YTD, the Strategy is +23.69% and is +1.23% ahead of a global equity index return of +22.46%. As the market style and sector leadership reversed our long-held relative sector positioning favouring Growth over Value and Technology/Healthcare over Financials/Energy sectors was detrimental to performance. During the month we slightly reduced our Technology exposure.


Elkstone Observations

September continued the recent trend pointing to a gradual global economic slowdown which is being addressed by monetary easing in the USA and Europe. The economic picture in the USA remains mixed, with weaker readings from the manufacturing and employment releases contrasted by relatively resilient indications around consumption. European business surveys in September highlighted a continuing deterioration. Chinese figures including industrial production and retail sales also indicated slower economic growth.

September witnessed a decline in volatility across the major asset classes which had become quite elevated in July-August amid “inversion and recession-talk” and nervousness around the beginning of a Fed easing phase which delivered the first rate in 10 years. Another catalyst for the back-up in bond yields in early September included temporarily lower political uncertainty in Italy, HK and UK.

At a sector level we have seen a reversal of the YTD trends with the lagging sectors leading in September and vice-versa. Cyclical sectors-Banks, Energy and Industrials have benefited at the expense of the more defensive-Real Estate, Utilities, Staples and Healthcare. The relative under-performance of Growth and Momentum also impacted Technology which is the largest sector. The market has effectively called a halt to the relative decline in the laggards but crucially without a sell-off in the overall market.

The rotation in September across and within equity markets saw a sharp under-performance of the previously strong Growth and the recovery of the lagging Value style. The chart below shows the recent behaviour of the World Index (Green Line) and its constituent Growth (Yellow Line) and Value (Blue Line) styles. It’s clear that the recent Value rally is small in the context of the Growth dominance in recent years. Since the global financial crisis in 2008, despite a strong secular trend of Growth out-performing Value and Defensives beating Cyclicals, there have been 13 rotations in which Cyclicals have outperformed Defensives by an average of 16% over 4 months.


Source: Bloomberg

While there has been a partial mean-reversion back into the most over-sold sectors and stocks, it is too early to suggest they have suddenly become the most attractive investment opportunities. Value stocks can be depressed for a good reason. So far in 2019 the deepest Value stocks have also seen the greatest EPS estimate reductions as they tend to be the most sensitive to economic conditions. A rotation to Value adds greater risk  and volatility to portfolios and decreases the potential returns given the associated negative earnings revisions. There is no major historical evidence for valuation, on its own, being the catalyst for establishing new market leadership. While accepting that the economic recovery has now extended over 10 years, up until now, corporate returns remain impressive. The approaching quarterly earnings season and the accompanying corporate outlook statements for 2020 will now be key for market sentiment.

Notable movers – Trailing 30 Days – EUR (€) Denominated Returns
Positive Performers
Positive Performers Trailing 30D (T1M)
EUR (€)
JD Sports +23.98%
AIB Group +18.33%
Whirlpool Corp +14.74%
Julius Baer +13.01%
Nike* +12.01%
Negative Performers
Negative Performers Trailing 30D (T1M)
EUR (€)
Takeaway.com (28.79%)
Evolution Mining* (24.08%)
K+S AG (22.08%)
Netflix (19.19%)
Starbucks* (18.70%)
Source: Bloomberg, 30th September 2019


This monthly marketing report should in no way be relied upon or substituted for the exercise of independent judgement. Elkstone has taken all reasonable care in the production of this material, but nothing in this note should constitute investment advice in any shape or form. Nor should it be perceived as giving accounting, tax or legal advice. This report is produced solely for educational purposes only. Individual circumstances differ, and readers should not act upon this content in any way. Readers should consult with their independent and regulated professional advisors before making any financial decisions. Prices can fall as well as rise, and may be subject to sudden and sharp moves. If you invest in the stock or other markets you may not recover the total amount originally invested. Historic performance in no way guarantees or indicates future price performance. Further risks to be aware of include currency and exchange rate fluctuations, which may also adversely impact your holdings. The educational information and opinions presented in this report were obtained or derived from sources that Elkstone deems to be reliable, but Elkstone or its related parties (employees, consultants, management, and directors) makes no representations or warranty, express or implied, as to their accuracy or completeness or correctness. Therefore Elkstone accepts no liability for loss arising from the use of the educational material contained within this newsletter.