Market Update by Rosetta Investments

Market Update by Rosetta Investments


Dear Investors, Partners and Friends,

As you are well aware, the start of the year is proving challenging for the markets. As of the time of this writing, the S&P 500 is down 13.5% for the year and the Nasdaq 100 – 22%.

These developments do not come as a surprise to us as we identified the increase in market risk already in October, when most participants were still living in euphoria. We already then reduced equity exposure systematically across our portfolios.

In the short term we believe that the current negative momentum is likely to continue as we see no catalyst for an immediate turnaround and a wide range of risk factors (geopolitical situation in Russia/Ukraine, difficulties facing the Chinese economy/COVID lockdowns, supply chain capacity constraints, high oil and commodity prices, recession risk, high inflation, raise in interest rates).

What makes the current situation particularly challenging is the high inflation. Under normal circumstances cash, deposits or high-quality bonds are the solution of choice in times of elevated risk but this is not the case today. With official inflation numbers in the US at 8% and real inflation likely above 10% these investments will not prevent a significant erosion of the real value of the portfolios if inflation persists.

Nobody can predict at this stage to which extent the current inflation will be sustained over time. It could prove transitory and get back to more normal level in a few months if the economy continues to slow down and if the raise in interests proves successful. However, with trillions of dollars literally printed for diverse stimulus programs in recent years inflation could also prove to be a longer term issue. We believe that an elevated inflation of 4-5% could well become the new normal over the next few years and that more extreme cases cannot be excluded.

In these circumstances our goal remains first and foremost to do everything in our power to preserve your capital. We follow a three-pronged strategy in order to reach that goal.

Firstly, on the defensive side, we are minimizing to the extent possible exposure to assets exposed to inflation and interest rates risk such as long duration bonds. Within equities we reduced exposure to the sectors least likely to maintain pricing power in an inflationary environment.

Secondly, at the level of the core strategy, we maintain exposure to first-class hedge funds with limited market correlation. We cannot emphasize enough the importance to spread exposure between a range of leading managers who are able to generate substantial returns over time with limited market exposure, limited correlation between themselves and effective hedging strategies.

Thirdly, we aim to address the inflation risk. We are doing so through investments into hedge funds with strategies particularly aimed at inflation hedging, real estate investments and investments in the stocks of companies active in sectors that are likely to resist best and, sometimes, even benefit from inflation and higher rates. This includes commodity producers (both agriculture and metals and mining), the banking sector, the healthcare sector, listed real estate, some retailing companies and, to some extent, precious metals such as gold and silver.

A paradoxical result of the inflation strategy is that we needed to increase again equity exposure. In this respect, we are willing to take into account an increase in short-term risk for the sake of longer-term capital preservation and growth.

We are, as always, available any time to discuss further.

With best wishes,

Ilan Weil, CIO

Orit Raviv Swery, Founder and CEO