April 2024

“The greatest danger in times of turbulence is not the turbulence; it is to act with yesterday’s logic.”  Peter Drucker

The flightpath to a soft landing hit a rough patch in April, as strong economic data (inflation, employment) put paid to any notions of imminent Fed rate cuts and led to a correction in markets.  The continued stickiness of inflation prompted Chairman Powell to roll back on his “Pivot” speech and led some economists to predict a hike as the next Fed move.  Chalk up another indictment of the “Forward Guidance” approach that has dominated central bank thinking for the past fifteen years.  Meanwhile, in the UK, a review of the BoE’s performance in forecasting and communication in the past three year highlighted “out of date” methods and shortcomings in its modelling and made the case that the BoE should be “exceptionally clear” when they believe market expectations are “inconsistent with its view”.  In other words, be better at providing Forward Guidance.  That such a review took place shows how far policy makers are from understanding the role this policy has played in creating current economic challenges.   That it was conducted by former Fed Chair Bernanke, arguably the architect of this failed policy, is Monty Python level farce.

This market anxiety led to another 50 bp back-up in USD 10Y yields, putting us almost back to the pre-Pivot levels.  The correction in Europe was less pronounced, reflecting softer economic conditions here, even if signs of a rebound emerged in late month data releases.  From this point on it seems as if markets have had most expectation squeezed out of them, and we therefore remain dominated by data.  The market is still at pricing some IR cuts in the future, and so signs of continuing strength will pose problems.  We hope that lessons will have been learned and that any future discussion about rates will not need to be walked back three months later.

It was an active month for financials, with most institutions reporting their Q1 results.  Across both the US and Europe, there was considerable dispersion driven by NIM and investment banking performance.  European results were generally well received, almost with a sense of relief that some significant capital repatriation will finally happen.  One commonly cited investment driver is the valuation discount to US banks, which on the surface appears to be the case (Price/Book, P/E ratio).  But it’s important to remember that the large US banks are structurally more profitable, have better market positioning and have a more consistent track record of delivery.  While the big European banks are able to return some capital, they still have too much of it allocated to unprofitable activities which have been a drag on performance.   So, the considerable valuation discount is warranted.  A better case can be made for smaller banks with excess capital and profitable businesses (many of which are in our cross hairs), which are still trading at a discount, and have the added advantage of being potential consolidation targets.

Given our positioning coming into the month April turned out to be fairly quiet.  There wasn’t a meaningful enough correction in AT1 markets to warrant a shift in strategy and so we focused on minor changes to positions.   For the month, the fund’s A shares returned +0.54% with most of the contribution coming from stable and outperforming credit securities with fixed income contributing +44bps in gross performance while equities added +22bps. We retain considerably flexibility to react to opportunities with particular focus on the broader picture as a key driver.