Following the desperate situation in March, by the last quarter of 2020 we found ourselves almost in a state of exuberance. The year will be remembered for the markets’ quick and spectacular turnaround. Once it was confirmed that the COVID-19 pandemic was spreading with virulence in Europe and America, the financial markets were left ravaged at the beginning of the year and many managers lost their bearings. The rout continued until it became clear that governments and central banks could organize a rescue that would at least be temporary, and that science, with stunning efficiency, could provide the glimmer of hope we so desperately needed.
Given that each of our three main strategies generated positive returns, we are well placed to end the year in positive territory, just as we had hoped at the end of the second quarter.
Although this last quarter was quieter than the previous two, the factors provoking considerable volatility in the financial markets – COVID-19, a highly uncertain economy, and the U.S. elections – are still very much with us. We therefore believe that our investors’ best interests over the next few quarters will be well served by the Amethyst Fund’s approach, which is based on achieving an absolute return with less volatility.
In comments made on March 23, Jerome Powell, Chair of the U.S. Federal Reserve (the Fed) suggested that the financial markets would recover in the second quarter. He confirmed that a liquidity shortage was rapidly developing in all sectors of the economy, and he offered his assurance that the Fed would do whatever was necessary, and use every resource imaginable, to fill these gaps as required. That was all it took: a substantial rebound in the second quarter erased much of the historic rout in equity markets during the first quarter.
Even in an environment where equity markets were already shaken during the last 10 days of February, the Fund nonetheless posted an altogether very acceptable result, down barely 0.5% for the first two months of the year. But March would prove to be much more difficult.
While we would have liked to add a few percentage points to the fund’s return for 2019, but for that we would have had to relax our risk management criteria, and that was not something we were willing to do. In a period of very low interest rates, the search for yield continued to drive a growing number of investors toward equity markets. These markets had a spectacular year, despite fears of an economic slowdown due to trade wars and the ongoing chaos in political and economic management in the United States.
Summer began as if the financial markets would be relatively calm. The recovery in mergers and
acquisitions, which had started in the previous quarter, quickly lost momentum. But the markets
still delivered some surprises, as we know can happen. Air Canada announced its intention to
acquire all the outstanding shares in Air Transat, and bond rates suddenly became highly
volatile in early September. Once again, our diversified positions allowed us to post a positive
return for the quarter. Now let’s take a more detailed look.
Not all accidents on the financial markets are avoidable. There were situations in the last quarter that tested our resilience. But once again, by diversifying the overall portfolio well and focusing on arbitrage opportunities day-in and day-out, we were able to post results that are, at the very least, acceptable.
While we would have liked to add a few percentage points to the fund’s return for 2019, but for
that we would have had to relax our risk management criteria, and that was not something we
were willing to do. In a period of very low interest rates, the search for yield continued to drive
a growing number of investors toward equity markets. These markets had a spectacular year,
despite fears of an economic slowdown due to trade wars and the ongoing chaos in political
and economic management in the United States.
By mid-December stock markets had become so volatile that the financial markets were under a cloud of fear. Despite a rally that began on Christmas Eve, the markets racked up record losses for the month of December and were down sharply for the year. At year end, the S&P/TSX composite total return index was down 5.4% on the month, and down 8.9% on the year. The bond markets were also buffeted from all sides.
Concerns that hacking represents a national security risk have become so serious that we now need to factor them into our transactions in the mergers and acquisitions market. An unusually high rate of failed transactions led us to examine why this happened, and we have taken the necessary measures to manage this risk.
Throughout the second quarter there were hopes that the U.S. administration would finally understand that imposing tariffs, first on steel and aluminum and then on a long list of Chinese products, could only be bad for both the U.S. economy and the global economy. This hope quickly faded. The trade war between the U.S. and China began on July 6, when President Trump confirmed that he was imposing tariffs on $34 billion of Chinese products. An eye for an eye, a tooth for a tooth: as promised, China’s leaders quickly responded by imposing tariffs on the same amount of goods. However, the Americans then raised the stakes, announcing new tariffs on products worth another $200 billion, only to be quickly matched by the Chinese. With the improvisation and chaos that seem to govern decision-making at the White House, it is impossible to have any sense of where this trade war will end. What we do know is that an economic shock is inevitable.
We have known for several quarters that volatility would return to financial markets eventually, and it finally did in February, with a vengeance. The S&P 500 VIX volatility index, wich slumbered below its historical average of 16 for almost all of 2017 and even began under 10, shot up as 50 in early February.
Une croissance économique mondiale synchronisée, des bénéfices des entreprises en forte expansion, l’adoption d’une réforme fiscale majeure aux États-Unis et des tensions géopolitiques qui s’apaisent quelque peu ont marqué l’actualité économique et politique du quatrième trimestre. Tout cela a permis la poursuite de la hausse des marchés boursiers et a poussé en fin d’année l’indice S&P 500 à 2674, soit un gain d’environ 20 % depuis un an, un résultat certainement supérieur aux attentes des stratèges financiers les plus optimistes.
Economies are doing very well, thank you. In spite of the expected impact from the hurricanes, the U.S. economy’s growth in the third quarter surprised most observers, reaching 3% according to the initial estimates of the U.S. Department of Commerce. Growth in the previous quarter stands at 3.1%. In Canada, even though we knew that the 3.7% and 4.5% growth achieved in the first two quarters of 2017 was unsustainable, the projected rate for the third quarter is still 2%. So the final figure for 2017 is expected to be approximately 3%. Annualized growth of the global economy now stands at around 3.7%, and the manufacturing indicators (global PMIs) are almost systematically reaching unprecedented highs.
The replacement of the Affordable Care Act (Obamacare) would have funded significant tax cuts in the U.S. and underpinned both economic growth and investors’ enthusiasm.
Donald Trump’s arrival in the White House has had an impact on markets as much as minds. The spectacular market surge that began the day after the November 7 election returned in a second wave in February following his inauguration as 45th President of the United States of America. But after a few weeks, it became evident that he would face an uphill battle turning rhetoric into action.
The climax of the fourth quarter of 2016 was undoubtedly Donald Trump’s election to the White House and, probably more so, the Republican majorities in the House of Representatives and the Senate. After a shaky night, risk assets reacted positively the following day. The new president is in a strong position to implement, without too much opposition, his stimulus program, combining tax cuts and increased public spending.
Until recently, the expansion of global central bank balance sheets seemed con-demned to increase indefinitely. But (thankfully), monetary policy makers have had a serious wakeup call: quantitative easing (“QE”) is less and less economical-ly effective and potentially harmful in the setting of risk premiums via negative short-term interest rates.
A multitude of risk factors have unsettled the markets during the first six months of the year. Britain’s decision to exit the European Union (51.9% vs 48.1%) has sent shock waves through financial markets and rattled investors who underestimated its risk. It is the most recent and blatant example of the growing global trend towards protectionism. It will have tremendous repercus- sions on the geopolitical landscape including this fall’s US election.
The first quarter of 2015 saw weaker than anticipated economic data south of the border. However, accompanying this slowdown in consumption, which was deemed temporary, was a new injection of stimulus to the global financial system. In theory then, we have a recipe for US stock prices to rise in the coming months, that is, unless geopolitical risks spoil the mix…