February – From FOMO to FOBO…and now Kaboom

As the monthly letter was just about to go to press, a major event took place over the weekend in the Middle East. Besides the human tragedy, the financial impact is hard to predict at this point and is not reflected in the month-end performance shown in the table below as the events took place after Friday’s market close. Be sure we will address this topic in next month’s letter and please reach out with any questions in the meantime. So far only energy seems to be significantly affected.

Fear Of Missing Out (“FOMO”) is a term you have probably heard in 2020-21 and again last year in our letters. As a reminder, in the context of investments, it refers to investors buying assets, even at all-time high, for fear that they may miss out if they keep going higher. This is an irrational behavior that can end up being costly, but which can explain certain market movements. This year, an acronym that describes well what is happening in the market is Fear Of Becoming Obsolete (“FOBO”). More on that in the chart of the month section.

The month of February was rich in notable events. There was the AI story, which this month really hurt software companies, the continued collapse of cryptocurrencies, the decision of the US Supreme Court to invalidate certain tariffs, tensions in the Middle East…there was certainly a lot for investors to think about and ponder where to place their money. Even central banks in England, Europe and Switzerland, for example, decided to refrain from any action in such an uncertain context.

Data source : Bloomberg

As you can see in the performance table above, the rotation away from the US and into the rest of the world is substantial. For an investor with a USD base currency, having an exposure to another market is even amplified by the weakness of the dollar. Strangely enough, this is happening in the context of better growth outlook and healthier employment figures in the US, and more dry powder for the Fed to act if needed

In terms of leading indicators, the US, Eurozone and China are all showing both services and manufacturing in expansion territory.  Divergence is however visible at the consumer level, with Europe being more negative than the US and China.

Emerging markets are having a smooth ride up the hill, as is pretty much always the case when the USD is weak. The reasons are that debt in hard currency becomes easier to service, it attracts international capital, helps reduce imported inflation, makes commodities more expensive (many emerging nations being commodity producers).

Our summary recommendations

In February, we took advantage of the volatility to issue structured products with downside protection and a guaranteed coupon. Furthermore, our investment committee decided to take a position in emerging market debt, which we had sold off back in early 2022 (rightfully so), at the expense of developed country corporate debt, which currently yields too little and is bound to worsen.

Chart of the month

The chart shows the evolution of the US Software Index in the past 6 months. The index lost over -30% since the all-time high of last September.

FOBO is the perfect acronym to describe the sector sell-off, with the rise of AI potentially rendering the business model of certain software providers null. We still have a little way to go before it happens, but the speed at which things are evolving should definitely be concerning for certain firms and their capacity to adapt in such a short period of time can be questioned.

This is another reminder of what we mentioned in the December letter, which is that investing in themes or sectors is a risky game that we prefer to avoid.

Source: Bloomberg

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