Artemis Strategic Assets Fund update

Source for all information: Artemis as at 30 June 2024, unless otherwise stated.

Market review

Markets were mixed in the second quarter. US equities rose, but the gains were limited to a small range of stocks. Government bonds were under pressure as investors moved to price in fewer interest rate cuts for the year.

Geopolitics also drove markets during the quarter. There were Middle East tensions at the beginning of the period and the snap French election at the end. In June economic data weakened, which added to the volatility and the uncertainty around the path of interest rates.

Performance

The fund continues to demonstrate low correlation to traditional assets, a key objective of the strategy. Since the change in fund manager, the fund has shown a low correlation to equities, bonds, and commodities.

The fund returned -0.8% over the quarter, underperforming the CPI + 3% p.a. performance target. Poor performance from the trend following Price-Based Signals (PBS) positions were partially offset by strong returns from our Market Driver Models (MDM).

The key drivers of the disappointing performance from the PBS portfolio were long equity positions and FX. Canadian and Australian bond positions also disappointed while our positions in Norwegian and Swedish Krone saw recent tailwinds reverse.

Within the MDM portfolio, our outright long position in US equities performed well, as did the long European equities vs. short European bonds position, despite the sell-off at the end of the period. A rebound in emerging market equities impacted our emerging vs developed markets position. FX positions worked well with sterling appreciating against the US dollar and Japanese yen.

Activity

Over the course of the period our aggregate short exposure to bonds reduced significantly, ending the month broadly neutral. Equity exposure remains at about 30%.

As at quarter end, our most significant positions were:

Short Australian bonds. We retain a high conviction short exposure to Australian bonds, motivated by our medium term price trend signal and negative carry, but have reduced short bond exposure elsewhere.

Short Polish Zloty long Czech Koruna. Our models predict a depreciation in the Polish currency, driven by a combination of rich valuations, slower economic momentum and unfavourable technicals. Conversely, favourable technicals, stronger economic momentum and a relative carry advantage supported our long Czech Koruna position.

Short Italian bonds. The key drivers of our short BTP position have been robust economic momentum coupled with weaker relative price momentum compared to other bond markets.

Outlook

US Activity Starting to Slow

Recently, we've had several signs that the labour market may be slowing, with unemployment moving higher and jobs being created at a slower rate than expected. Whilst inflation is yet to decline to target, some favourable comparisons from a year ago have seen the headline number fall to 3.1% year-on-year in May, although the less volatile core measure is higher at 3.4% year-on-year. The Federal Reserve still needs to see more evidence of inflation slowing, despite the recent softening in the labour market, before it signals rate cuts are coming.

Sticky Inflation Gives Central Banks less Flexibility

Last year the Federal Reserve provided a relatively clear signal that interest rates would be cut from around March this year. At the time of writing, we've had early signs that US economic activity is slowing, yet the most recent inflation prints remain relatively elevated against the Fed's target. For now, the Federal Reserve is not rushing into rate cuts, but markets want to believe they are coming, which will lead to higher equity and bond market prices. Nevertheless, the same markets have been wrong about how soon cuts would come several times this cycle already.

If Activity Slows Significantly, Stocks will Decline

If economic growth begins to slow significantly, company earnings will roll over, and stocks will actually fall as the economy moves into recession, this may happen sometime in late 2024 across most major economies. But we have a US election to navigate as well.

European Cutting Cycle Limited

It is unusual for the European economy to lead the global economic cycle, so the ECB having started cutting rates does not necessarily signal this is the start of a series of rate reductions. The region remains highly vulnerable to political and other idiosyncratic risks.