Vector 2019 Q3 Review

16 Oct 2019

Dear investors,

Even though earlier on the quarter investors had struggled with the US-China trade tensions, global markets were quick to wipe away the August blues as yet another round of monetary easing from the United States and Europe was announced last month. All-in-all equity delivered 3.1% in September and 4.4% over the quarter - in Euro-terms at least.

The USD, which rallied significantly in Q3 2019, goes a long way in explaining these returns as “fundamentally” there weren’t many reasons for investors to start cheering. Most data – from a declining pace of growth in aggregate hours worked in the US to disappointing manufacturing figures in Europe and deteriorating consumer confidence in Japan – paint a picture of a global economy that is slowing down. While the Fed’s rate hikes and ECB’s shift to a state-dependent instead of date-dependent policy should in theory induce people to consume more, economists are increasingly starting to question whether it makes sense to keep adding monetary stimulus to todays’ economy. A recent study by JP Morgan puts forward three externalities which could actually negatively impact aggregate demand:

• The income effect, which lowers income for savers and expenses for borrowers

• The confidence effect, which impacts confidence in economic prospects

• The expectations effect, which discourages borrowing in anticipation of lower rates

JPM’s data scientists argue that these externalities may more than offset the positive effects (price effect, wealth effect, currency effect) and cause the overall impact of additional monetary stimulus in today’s economy to be low, at best, or negative, at worst… We tend to agree with most points raised in the article, which is also reflected in the hedge ratio of Vector Flexible (~60%) that is currently at a rather elevated level. Sadly, being defensive has not paid yet as markets rallied substantially in 2019. Then again, so did markets on the eve of the dotcom crisis…

Vector Navigator recorded a return of 1.91% during the month. Vector Flexible, which is positioned rather defensively in light of a weakening economy, virtually did not move during the month (+0.05%).

Best regards,

Werner, Thierry and Nils