March 2024

“These were happy days, the salad days as they say…” H.I. McDunnough

It certainly was salad days for markets in March, as the prospect of a soft economic landing, the boundless potential for A.I., and relative calm in an otherwise rancorous political environment trumped the deteriorating fiscal situations of most governments and the grinding halt to the decline of inflation.  Equity markets put in strong performances while bond yields ominously rose to levels last seen before markets began their upward surge in Q4 last year.  One-by-one expected rate cuts have been deleted from the calendar (from 6 to 3) as employment data has remained strong and disinflation has slowed, and even the brewing commercial real estate (CRE) crisis has been pushed into the background as New York Commercial Bank (NYCB) received a $1 billion equity injection to calm jittery investors.  If this is an indication that the CRE issue is already receding, then a major driver for easier credit will have faded.  So, if there’s no immediate pressure for the Fed to act, under what scenario might they still cut in June?  For that answer we might look to Europe, where the case for lower rates remains strong, but the ECB is reluctant to lead the way on cuts.  A Fed cut or two would not fundamentally affect monetary conditions for the USD but would clear the way for other central banks to move.  We would see this as a constructive scenario, although US markets might be disappointed.  However, if data between now and then further diverges between the two regions, then all bets are off, and any thoughts of happy, salad days might become a distant memory.

Aside from the blissful mood, there was not much to distinguish the month.  Central bankers continued to dissemble on monetary policy while waiting for confirmatory data, but recent trends – namely continuing softness in Europe and resilience in the US – remained consistent with previous months.  Germany announced that it was considering a stimulative €7 billion tax package, de minimis in a €4.3 trillion economy and probably not even enough to cover the bar tab at Munich Oktoberfest, but it highlights that the ECB may have to carry the load in supporting a weakening Eurozone given tight finances.  Within the financial sector equities were the star performer, outperforming broader markets, as the view that structural excess capital positions will fuel significant repatriation in the months ahead gathered momentum.  As we remain somewhat sceptical about the continuing capital generating capacity of many of the largest banks, we urge caution and maintain our preference for smaller, simpler business models, or specific situations with catalysts for performance rather than reliance on bank managements’ rosy business cases.  Credit and AT1 markets were very quiet with a slight positive bias reflecting rate moves.  For the month, the fund’s A shares returned +1.03% with gross contributions from credit and equity at +131bps and -9bps respectively.

We entered March with a relatively defensive posture and did little to alter that through the month.  Our focus remains firmly planted on the unfolding macro story and the impact of shifting perceptions will have on our markets.  In addition, potential CRE exposures, and the degree to which the market has over/under discounted them, also present an opportunity.  We will also see Q1 results in the weeks ahead, but fully expect recent patterns to once again be validated, namely investment banking businesses will be a drag while NIMs in smaller lenders remain healthy.  Patience will remain the order of the day.