July 2023

“Vladimir: ‘Well? What do we do?’

Estragon: ‘Don’t let’s do anything. It’s safer.’” 

A rather traditional July set against an economic and market environment in transition.  Markets generally treaded water in an air of calm anticipation as the month’s data releases generally revealed moderating growth and inflation, however not at a significant enough pace to alter the narrative.  Concerns over commercial real estate (CRE) exposures, slowing manufacturing and softer sentiment indexes were offset by labour market resilience, service sector strength and a consumer hell-bent of spending every last bit of savings accumulated over the past few years creating see-saw markets that went nowhere.  Considering where we are in the cycle this should not be surprising.  Rate hikes by key central banks (Fed, ECB) were taken to be the last for a long time even as the potential remains for an additional move in the Autumn.  And so we remain data dependent, barring an exogenous shock.  Enjoy the dog days of August and see you in September…

The month also brought Q2 results with US banks leading the way.  There were few surprises, with investment banking units showing mixed performance while commercial and retail banking continuing recent momentum.  Interestingly there were few specific signs of stress emerging from the CRE sector.  Sentiment improved with the announcement that PacWest, one of the regionals in the spotlight back in March, agreed to be acquired by Banc of California.  As expected, the Fed formally announced that it was raising capital requirements for the eight largest banks, all of which were already in surplus positions, thus confirming that capital ratios only ever move in one direction, regardless of circumstance.  General revenue trends were replicated in Europe, where NIMs remained resilient, fuelling outperformance by smaller lenders, in both equities and credit.  Overall positive outcomes in this year’s stress tests also helped solidify the positive vibe and underscored the positive vibe for the sector.  The three largest UK banks had a month they would rather forget…

For the month, the fund’s A shares rose 2.36% with credit contributing +252bps in gross performance and equity +4bps.  We took advantage of the strength to follow through on our plan to trim positions that were getting to near term objectives.  Once early data is out of the way it should be a relatively quiet and orderly August, although we are reminded that the month has a bad habit of producing nasty surprises (1990 Kuwait invasion, 1991 Soviet coup, 1998 Russian default, 2007 money market failure etc) which show up to ruin the mood.  Notwithstanding this, we fully expect to continue to focus on harvesting certain holdings while remaining positioned to take advantage of short-term volatility.