Index rebalancing strategy
In the first half of the year, the number of stock entries for S&P indices was lower, due to a lower number of M&A deals having closed - even though the M&A activity has seen one of the best starts in recent years. As a consequence, the turnover of quarterly rebalancings was higher. The main adjustments during this first half of the year, and particularly during Q2, were the introduction in S&P 500 of Crowdstrike, a cybersecurity company* and KKR & Co, a private equity company *. The environment was rather supportive overall for the strategy.
Relistings were another major theme during the period, which gave us the opportunity to generate performance (example: CRH * which exited the MSCI Europe on May 31th on European close and entered the MSCI USA on the US close). Shell * announced in April that they were considering a main listing in the US, followed shortly thereafter by TotalEnergies *.
Lastly, in the continuity of 2023, the AI frenzy has continued to generate opportunities in the index universe. A year ago, Nasdaq had undergone a major ad hoc rebalancing to reduce the concentration of the « Magnificient 7 ». During the June quarterly rebalancing, the Technology Select Sector Index, a sub-segment of the S&P 500 that includes companies engaged in developing or producing technological objects, experienced two major reweightings. Indeed, the rules for this index seek to minimise the concentration of the largest weights in the index by an iterative « capping » mechanism. NVIDIA then moved from 3rd to 2nd largest market cap worldwide, and surpassed Apple, and its weight in the index increased - Apple seeing his own weight decrease by losing a rank. This move generated flows of $12 billion and $14 billion respectively on both stocks *.
Relative value strategy
As a reminder, the relative value strategy seeks to exploit medium-term inefficiencies on valuations by adopting long positions on under-valued stocks (so-called cheap) and short positions on overvalued stocks (so-called expensive).
The strategy behaved fairly normally over the first six months of the year although it went through two difficult periods. After a favorable period in 2023, particularly at the end of the year, the environment deteriorated twice during the first half, which caused two sharp declines for the strategy in February and June, which were largely linked to periods of macroeconomic uncertainties and monetary policy guidance.
- End January / February: publication of above expectations inflation data and lower-than-expected unemployment rates (evidence of a healthy economy). The market stabilised in March.
- End May /June: inflation data were in line with expectations, despite some contradictory macroeconomic data. Markets focused on those pointing to the resilience of the US economy, particularly on the employment front, which in turn weigh on the risk of persistent inflation and, above all, a delay in the rate tightening trajectory.
This was particularly confirmed by a very « hawkish » tone of the Fed at the mid-June meeting.
We started the year with a scenario of 6 rate cuts for 2024, and at the end of the half-year we had barely one planned while a scenario of «higher for longer» took hold. These uncertainties are weighing on the economic health of smaller companies for whom a higher rates environment means lower potential growth and refinancing issues.
At the same time, highly valued companies have become even more expensive, especially in the technology sector which is still driven by the promises of AI. This penalized the performance of the strategy at the end of the first half of the year.
In July, CPI figures pointed to an improvement on the inflation front with the first negative month-over-month change since the beginning of the pandemic. This triggered a significant turnover in favour of undervalued companies and at the expense of the more overvalued sectors (such as tech companies), and has allowed the relative value pocket to erase the June setback.
Past performance is not a reliable indicator of future performance. Markets may evolve very differently in the future. This can help you assess how the fund has been managed in the past.
Source : Candriam as at July 2024.
Index rebalancing strategy
- The themes should remain the same as at the beginning of the year : geopolitics, elections bringing volatility, an environment favourable for index rebalancing strategies.
- If the concentration issue resolves, there should be more stocks entering indices that seek to represent a certain % of total market capitalization.
- Index rebalancings for the various index families will occur according to the following schedule:
Source: Candriam, August 2024
Relative value strategy
- The beginning of August was marked by employment figures below expectations, raising fears of a hard landing and a delay in the first rate cuts by the Fed, hence a risk of recession in the US. This triggered a significant sell-off on global markets.
- We expect the relative value bucket to experience some volatility until the path of rate cuts is clarified, but we anticipate a stabilisation as soon as the timing becomes more precise.
At the time of writing, the market is pricing three rate cuts before the end of the year.
* : Data presented as an example, not a purchase recommendation on this security.
Risks
All our investment strategies involve risks, including the risk of loss of capital. The main risks associated with our Equity Market Neutral Equities strategy are: risk of loss of capital, equity risk, risk associated with derivative financial instruments, counterparty risk, arbitrage risk, sustainability risk
For further details on risks associated with investing in the promoted strategy, a general description and explanation of the various risk factors is available in the section Risk Factors of the strategy regulatory documents.
This is a marketing communication. This document is provided for information purposes only and does not constitute an offer to buy or sell financial instruments, nor does it represent an investment recommendation or confirm any kind of transaction. Although Candriam selects carefully the data and sources within this document, errors or omissions cannot be excluded a priori. Candriam cannot be held liable for any direct or indirect losses as a result of the use of this document. The intellectual property rights of Candriam must be respected at all times, contents of this document may not be reproduced without prior written approval.
Warning: Past performance of a given financial instrument or index or an investment service or strategy, or simulations of past performance, or forecasts of future performance does not predict future returns. Gross performances may be impacted by commissions, fees and other expenses. Performances expressed in a currency other than that of the investor's country of residence are subject to exchange rate fluctuations, with a negative or positive impact on gains. If the present document refers to a specific tax treatment, such information depends on the individual situation of each investor and may change.