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In for a penny... for a pound! Or perhaps not? Is there an exit from Brexit? The European Court of Justice is currently deliberating on whether it is possible to revoke the triggering of Article 50 and, if so, how? With negotiations on the EU side at an end and the withdrawal deal having been endorsed by the remaining 27 member states at the most recent EU summit, Theresa May has a problem. The deal still has to be approved by the British Parliament and, at the time of writing, it is looking increasingly likely that May’s government will not get it passed. Criticism of the deal is just too strong, as it would tie the UK to the EU for too long, with the UK having no say. Even the Chancellor expressed the opinion that the UK would be better off staying in the EU. However, the ECJ has to clarify whether staying is a possibility at all. If Parliament rejects the deal and if the ECJ rules against revocation, a hard Brexit would ensue, with catastrophic consequences not just for the UK but for the whole of the EU¹. 

However, it remains to be seen whether things will turn out as bad as the study just published by the UK’s central bank, the Bank of England, predicts. In the worst-case scenario of a disorderly, no deal Brexit, the BoE expects Britain’s GDP to contract by as much as 8 % in the first year. House prices are forecast to decline 30 %, commercial property prices would fall almost 50 % and the value of the pound sterling would drop 25 %. On top of that, consumer prices are predicted to soar and inflation would rise to 6.5 %. One can only hope that things don’t turn out that way (or even come close). If the ECJ rules that revocation is possible, the hope is that a second referendum will be held and 29 March 2019 will simply be a day like any other. Then, apart from it having been a waste of time and effort, we could dismiss the last two years as nothing but a bad dream.

Figure 1: Chart of UK credit default swaps (CDS)

Figure 2: Chart of yield differential between current 30-year and 10-year UK sovereign bonds (Gilts)

Figure 3: EUR/GBP exchange rate

Figure 4: Year-on-year change in house prices in London and UK

However, it looks like the capital market is not taking the possibility of an exit from Brexit seriously. While the cost of insuring exposure to debt is rising (see Figure 1), it is still low, with 35 bps corresponding to a probability of default of just 3 %. In comparison, Italy’s CDS is 250 bps, meaning a probability of default of 20 %. The market appears to be having rather more problems with longer-term inflation. The difference between the yields on current 30-year and 10-year UK sovereign bonds (Gilts) (see Figure 2) rose sharply after Theresa May returned to Westminster with her deal. It seems hardly anyone believes that the deal will be approved by Parliament. The pound sterling, on the other hand, remains stable (see Figure 3). While property prices in general appear to be slipping, only in London are we seeing an actual slump in house prices (see Figure 4). However, after years of double-digit price rises, perhaps it is time for a cooling off in the London house market without the need to panic.

In any case, the next few days and weeks will be interesting. Should another referendum come about, one can only hope the Brits show enough common sense and keep calm. I, for one, would welcome back the UK.

Figure 5: Chart of prices of WTI crude oil and one industrial metals index

Figure 6: Supply of and demand for crude oil according to the projections of the US agency Energy Information Administratio

We turn now to crude oil, in a follow-up to last month’s market commentary Fin de Siècle. Even though Donald Trump² tweeted that falling oil prices were good for the economy, and even credited himself with them, falling oil prices are often a sign of a flagging economy. Figure 5 shows the trend in the prices of WTI crude oil and one industrial metals index. One can see that although the latest fall in the price of oil (-35 %) is extremely sharp, industrial metals are also well back, down 22 %. This would point more towards a fall-off in demand and would support the theory we put forward in last month’s market commentary: that we are at the beginning of a slowdown in the global economy. The US Energy Information Administration also projected a decline in demand for crude oil for 2019 (see Figure 6). Perhaps they should let their own president know their projections. 

In light of this, Fed Chair Powell’s comments that federal funds rates were very close to the vicinity of neutral take on a different meaning. Inflation expectations are falling, and thus possibly also the need for the Fed to make one or two rate hikes. On this side of the Atlantic, one would hope that the European Central Bank realises the window for rate rises in the eurozone could close soon. The capital market, on the other hand, is not expecting any rate rises before the end of 2019. We fear the market might be right.

In this environment, bonds could once again deliver positive returns. The yields on 10-year US Treasuries again appear attractive, at over 3 %. One has to keep a very close watch on the market to determine whether the economic downtrend will continue and potentially intensify, or whether it will turn out to be no more than a dip in growth. If a disorderly Brexit transpires – and, given the stakeholders, this possibility cannot be ruled out even with the best will in the world – then growth in the eurozone will be impacted too. Fingers crossed!

¹ An Advocate General of the ECJ stated on 4 December 2018 that unilateral revocation of the notification to withdraw was possible in his opinion. The court will rule at a later date. See:


Positioning of the Ethna Funds


October 2018 has already been described more than once as a very bleak month. While November 2018 turned out to be more or less neutral for equity markets, it was much less benign for the credit markets. In the investment grade segment, the euro and US dollar spreads widened by 20 basis points. The non-investment grade spreads widened a good deal more, at 55 basis points. For some readers this may not seem like much, but assuming a maturity of 10 years, the increase would mean a fall of 1.5 % in the investment-grade valuation; in the non-investment grade segment it would mean a loss of more than 3 % off the valuation.

  • In addition, weak leading indicators and sharp falls in the price of crude oil (-20 %) have led to a sell-off of corporate bonds and, along with it, sparked concerns about a premature slowdown in the global economy. 
  • Naturally, these developments have had implications for the valuation of the Ethna-DEFENSIV as well, with a loss of almost 1%. The fund management is in the process of shortening the fund maturity structure significantly. At present, the bond portion of the Ethna-DEFENSIV has a duration of 5.6 (unhedged), down from more than 7.3 in the previous month. For 3% of the fund volume, 5-year US Treasuries were purchased, increasing the hedged duration from 2.8 to more than 4.2. The slightly more cautious statements made by Fed Chair Powell at the end of November suggest that there could be fewer rate rises by the Fed than previously thought. This caused a sharp fall in the 10-year US Treasury yield, to 3 %. At this point in time, we consider it quite likely that the yield will drop below 2.9 % and have positioned ourselves accordingly.


Last month featured some important events. Fed Chair Jerome Powell gave an important speech at the Economic Club of New York, and the G20 summit in Argentina was awaited with anticipation. It was easy to miss other news in the shadow of these two events. Other important developments included the Italian government’s willingness to make budget changes, as well as the military incident in the Kerch Strait involving Russia and Ukraine. The confrontation led President Trump to say during the summit that he would cancel his sit-down with President Putin. The summit itself did not yield any major decisions. The highly anticipated meeting between President Trump and his Chinese counterpart Xi brought about the desired hiatus in the customs dispute between these two economies for the time being. This gives us two very supportive events for the markets: a sort of ‘Powell put’ – though it may be too early to call it that – and progress in the trade dispute between the US and China.

  • The markets seem to have been waiting for such support. Depending on the equity market, performance for the month ranged from plus to minus 3 percentage points, with movements peaking at more than 10%. While the environment for equities improved in the last week of the month, the spreads for investment grade and high yield bonds, on the other hand, remained close to their respective highs for the year. US Treasury yields again reached the 3.25 % level before heading towards 3 % in an almost linear fashion. One reason for this was the statements from the Fed Chair, while another was the falling price of oil. The latter fell sharply for the second month in succession and did nothing to help raise inflation expectations, one factor needed for interest rates to rise.
  • Since we had improved the quality and stability of the portfolio in the months prior, we were not compelled to take extra risk management measures despite the higher volatility. The bond portfolio survived the very challenging environment of rising credit spreads with just a small loss. While the portfolio’s long duration helped in the first half of the month, it detracted slightly in the second half. During the month, we again held a short position on Italian sovereign bonds in anticipation of an escalation of tensions between Italy and the EU. Italy’s willingness to compromise, however, as mentioned above, prompted us to close the position at a small loss. Within the equity portfolio, we were able to hold on to our future position, even in falling markets, thanks to our option positions that made a positive contribution and offset some of the losses. This enabled us to further increase our exposure ahead of the G20 summit, in anticipation of a positive solution for trade. Our equity allocation remains focussed on the US and Chinese markets. That said, since last week a portion of the portfolio has been invested in German equities, as these should benefit the most from a settlement of the trade dispute. The equity exposure was just under 30%¹ at month-end. We will take advantage of coming rallies to bring it back down to between 20% and 25 %.

We believe that a conservative portfolio positioning is ideal in this late phase of the cycle. In our opinion, a recession is not yet imminent. For every investment, we assess the risks and opportunities in-depth and only enter into positions when the risk/reward ratio is appropriate.

¹ This takes account of the temporary increase in the equity exposure prior to the G20 summit, which is not included in Figure 9 for accounting reasons.


The market storm described in last month’s market commentary has passed but there’s no sign of a stable high or completely clear skies yet. After the losses in October, November began strongly, especially for the US stock markets, and the indices made strong gains. As in the past, Europe unfortunately couldn’t compete and its performance was weaker but still positive. Towards the middle of the month the gains began to dissipate and the indices again swung around to the negative. Fed Chair Powell’s comments about US monetary policy were found to be dovish, and triggered a brief market rally in the US at the end of November. The US indices subsequently gained more than 2% in one day. The positive reaction from European stock markets to the strong figures from overseas was rather muted, resulting in them closing November in slightly negative territory, while US stock markets closed slightly up. In recent months we have talked about the deadlock in equity market signals and this situation is unchanged, i.e. according to our market analysis, the positive and negative signals are more or less balanced. Optimists say the glass is half full, while pessimists say the glass is half empty. However, we are trying to deal with this tricky market situation by having a balanced allocation. Accordingly, we have positioned our portfolio as follows:

  • The gross equity allocation remained stable in November, at around 60%. The net equity allocation after hedging, on the other hand, varied to a much greater extent on account of the strong market movement. In the lull, around 20 November, the net equity allocation was only just above 40 % due to the higher price of options. We made good use of this situation and closed some of the hedges in the US, which brought the equity allocation back up to around 50 %. The hedges were reopened later in the month at more attractive prices, but this had very little effect on the equity allocation. Looking ahead, we will consistently pursue this strategy and take profits on hedges as prices fall and rebuild protection again as the market recovers.
  • There were highly significant movements in the fund’s individual equity portfolio in November, which had a major impact on performance. The most marked was the fall in the price of oil, which, following a weak October, fell further, by a good 20 % over the month. Cumulatively, oil has lost more than 30 % in just 2 months. For this reason, the trend in the commodity sector securities Total, Royal Dutch and UPM Kymmene was weak. In contrast, the German Lufthansa share benefited, and made the biggest gain in November.  The technology names Alphabet (US) and Alibaba (China) – just recently added to the portfolio –also performed well. The food sector stocks KraftHeinz, Tyson Foods and General Mills belied their defensive character in November, as all came under selling pressure. To strengthen the conservative profile of the fund, another US stock with defensive properties, Medtronic, was added to the fund. Medtronic has been a leader in the field of medical technology for decades and, in keeping with this, has high margins and better-than-average growth prospects.
  • When US interest rates rose at the beginning of the month, we topped up our position in long-dated US Treasuries. With a weighting of just over 10 %, these once again make up a significant portion of the fund. Towards the end of the month, interest rates in the US fell a few basis points across all maturities, meaning that US Treasuries made a positive contribution to performance.  

Following the stock market correction, our analysis again shows more attractive valuations on the global markets. On the other hand, we have slow economic growth, which is hurting the cyclical sectors in particular. With this in mind, we will continue to successively reduce cyclical securities in the portfolio. On the whole, given its ongoing substantial equity allocation coupled with the hedging components and above-average cash holding, we believe the Ethna-DYNAMISCH is still well positioned in the current environment.

Figure 7: Portfolio ratings for Ethna-DEFENSIV

Figure 8: Portfolio composition of Ethna-DEFENSIV by currency

Figure 9: Portfolio structure* of Ethna-AKTIV

Figure 10: Portfolio composition of Ethna-AKTIV by currency

Figure 11: Portfolio structure* of Ethna-DYNAMISCH

Figure 12: Portfolio composition of Ethna-DYNAMISCH by currency

Figure 13: Portfolio composition of Ethna-DEFENSIV by country

Figure 14: Portfolio composition of Ethna-AKTIV by country

Figure 15: Portfolio composition of Ethna-DYNAMISCH by country

Figure 16: Portfolio composition of Ethna-DEFENSIV by issuer sector

Figure 17: Portfolio composition of Ethna-AKTIV by issuer sector

Figure 18: Portfolio composition of Ethna-DYNAMISCH by issuer sector

* “Cash” comprises term deposits, call money and current accounts/other accounts. “Equities net” comprises direct investments and exposure resulting from equity derivatives.

The investment funds described in this publication are Luxembourg investment funds (fonds commun de placement) that have been established for an unlimited period in accordance with Part I of the Luxembourg Law of 17 December 2010 relating to undertakings for collective investment (the “Law of 17 December 2010”). An investment in investment funds, as with all securities and comparable financial assets, carries the risk of capital or currency losses. The price of fund units and income levels will therefore fluctuate and cannot be guaranteed. The costs associated with fund investment affects the actual performance. Units should solely be purchased on the basis of the statutory sales documentation (Key Investor Information, sales prospectuses and annual reports), which can be obtained free of charge on the website or from the fund management company ETHENEA Independent Investors S.A., 16 rue Gabriel Lippmann, L-5365 Munsbach. All information published here constitutes a product description only. It does not constitute investment advice, an offer to enter into an agreement for the provision of advice or information or a solicitation of an offer to buy or sell securities. Contents have been carefully researched, compiled and checked. No guarantee for correctness, completeness or accuracy can be provided. All information published here constitutes a product description only. It does not constitute investment advice, an offer to enter into an agreement for the provision of advice or information, or an offer to buy or sell securities. The contents have been carefully researched, compiled and checked. No guarantee can be given for correctness, completeness or accuracy. The information includes past data which are no indicator of future performance. The management fee, custodian bank fee and all other additional costs are taken into account in the calculation of the unit price as stated in the provisions of the contract. Performance is calculated using the BVI method (German federal association for investment and asset management), which means that the calculations do not include an issuing charge, transaction costs (such as order fees and brokerage fees), custodian bank fees, or other management fees. Including the issuing surcharge would reduce performance. The performance shown is not a reliable indicator of future performance. Munsbach, 05/12/2018