We have reached the halfway point of the year, an opportune moment for a first evaluation of performance and what we can expect from the second half.
Simplify 02 started the year with a reduced equity component (and focused towards energy stocks) and relatively high cash. It seemed clear to us, at the end of 2021, that equity valuations had reached unsustainable levels and that there were concrete prospects of a significant rise in inflation. Holding a large cash position was counterintuitive but paid as both equity and bonds were pushed down by inflationary and monetary policy fears. Maintaining cash allows us to be ready to seize future opportunities.
The strategy turned out to be right: in the first part of the year, equities and bonds suffered double-digit losses while Simplify 02 recorded an absolute positive performance for moths.
The beginning of the second semester is now around the corner. Below we report the main points of attention and our basic guidelines that we would be happy to present you individually.
1. It is reasonable to expect that the US economy (main reference, with the Chinese one, for the financial markets) will contract for a few months, exposing the S&P 500 to a further decline of 15-20%. For this reason we prefer to avoid exposure to this index while recognizing the leading nature of many of the companies in it.
2. In Europe, the situation is no better, also given the continuation of the war in Ukraine. We expect a start to the solution of the conflict. In this sense, the offer of European Union credit lines and other political signals should be read. The possible settlement of the conflict would open the reconstruction phase with the related investment opportunities in some sectors. We stay at the window for now.
3. Several signs (detailed in the June newsletter) seem to indicate that inflation may have reached its peak or at least in the stabilization phase. We are therefore keen to increase our exposure to high quality bonds, both in dollars and in euros.
4. Gold and gold mines continue to occupy a central role in our asset allocation even if we do not expect significant changes in prices in the coming months. We expect to maintain our current positions and await the next changes in real rates (one of the main drivers of prices) before taking new measures.
5. Volatility (VIX) remains high, in fact the best asset class of the year. The extreme unpredictability of the curve requires, however, a good dose of courage to those who want to take advantage of it.
6. High dividend global stocks, such as energy and commodities, remain among our favorites despite the adverse economic cycle.
7. Finally, the bonds. After a disastrous start to the year, the class could benefit from this unusual economic cycle. In a scenario that will remain volatile, we believe it is appropriate to limit risk by focusing on investment grade rather than high yield. In Italy, we are oriented towards hybrid debt because the conditions for an economic slowdown are reasonably priced. It is also advisable to focus on the level of valuations rather than predicting the future by trying to identify the bottom of the market (good risk management, as claimed at other times, is preferable to forecasting the future). The average of our selection is 300 bps> BTP.
It will be a difficult second half of the year but, for Simplify 02, also full of opportunities. We do not expect a hard landing of the US economy (the labor market is very strong) and we will be able to take advantage of the liquidity we have set aside. It is just a matter of being patient before resuming a full-fledged activity.