Q3 2023 was marked by challenges in financial markets, with a notable sell-off in bonds. Concurrently, the US government averted a shutdown, and oil surged with the Israeli-Hamas conflict. In the September FOMC meeting, the Fed opted to leave interest rates unchanged but adopted a hawkish tone. In the backdrop of these developments, the ongoing conflict in Ukraine and sluggish reopening momentum in China further weighed down market sentiment.
Considering these multifaceted challenges, our investment approach remained vigilant. Since our last update, we have taken profits in select holdings, particularly in consumer luxury, and raised cash levels to 48% within our portfolio. This move was motivated by our anticipation to adopt a defensive posture during market weakness.
In an environment where valuations seem to have soared against the backdrop of a faint economic pulse, it is important to acknowledge cash is not merely a dormant asset but rather a strategic reserve awaiting deployment when market conditions become more favourable. The remaining 52% of the portfolio is allocated to carefully chosen companies with robust earnings and fortified balance sheets. In addition, given the challenges posed by China’s weak economic environment, we have factored in the need to minimise our exposure to companies heavily reliant on Chinese revenue streams.
Amid the challenging landscape, there is optimism. Looking ahead to the US presidential election in 2024, historical data suggests that US stock markets often experienced positive returns during pre-election years. This is because the incumbents typically implement measures to stimulate the economy and bolster stock market performance to enhance their re-election prospects. Nonetheless, it is essential to recognise that predicting markets with certainty remains elusive.
At Eu Capital, risk management is the cornerstone of our investment philosophy. We do not make investment decisions lightly nor outsource risk management to anyone else. Our decision to raise cash in the last quarter while the markets were euphoric was a testament to our commitment to safeguard your investments.
As of writing, Valence Global Fund’s YTD performance is 21.70% (10 October 2023). The fund operates as an unconstrained macro fund, seizing opportunities within market gaps. Amidst challenges, opportunities inevitably arise. As we ride the waves of Q4, we thank you for your trust and perseverance.