June 2024

“People never lie so much as after a hunt, during a war or before an election.”  Otto von Bismarck

In a year which will see the highest number of humans in history cast ballots, June markets were impacted by unexpected election announcements in France and the UK, while the US presidential race got going in earnest with an unusually early debate, despite the fact the two candidates have not yet been formally nominated by their parties.  Yet for all the drama of campaigns it was the surprise French parliamentary elections announced for the end of the month that most rattled markets.  Called by the president in response to major losses suffered by his party in European elections, the fear of big-spending opposition parties potentially being in charge of the domestic policy agenda initially saw a 35 bp widening of sovereign spreads before recovering some lost ground and stabilizing later in the month.  The fear that a fiscal deluge set off by the unwinding of measures like pension reform also affected peripheral European markets in what became a ”mini risk-off” moment, although at no point did we see market disruption.  Whatever the outcome of the two rounds of voting – our view is that no party will have a majority and therefore it will be difficult to drive their agenda – some measure of increased risk premium will surely remain, reflecting lingering uncertainty and deteriorating fundamentals of France.  In the UK, the campaign thus far has done nothing to alter the consensus that the ruling Conservative party is facing a wipeout of biblical proportions, and the only remaining speculation is focused on whether Milan or Dubai will be the destination of choice for fleeing finance professionals.

Aside from politics, monetary policy and the factors affecting it remained the central market focus.  As expected, the ECB cut rates by 25 bp (as did the Swiss) while the Fed validated the recent back up in yields by shifting its (meaningless) “Dot Plot” from an expected three cuts to only one this year.  These divergent paths reflect recent trends in underlying economic data, where parts of Europe remain soft while the US is more mixed, with some aspects retaining more momentum.  In response equity markets recovered May’s losses while government bonds rebounded to post lower yields.  In general commentary it is clear that central bankers are still aiming to thread-the-needle with policy – hinting at more cuts that reflect lower inflation while retaining “vigilance”.  This approach will see them through the summer, but it also means that any sign of further weakness in economies will lead to significant speculation about future cuts.  No longer are cuts required to justify existing levels as the market remains in a reasonable equilibrium and new information is required if the current dynamic is to shift.

Financials also traded lower after the French election announcement, with the equity index falling 8% before rallying partway back by month end, while some French AT1s were off about 5 points at the lows.  Notwithstanding the recovery, financial assets generally finished lower than they had been at the end of May.  Given our expectation of second round results current levels are unlikely to see significant moves, leaving us once again focused on fundamentals – both economic data as well as Q2 results, which we will start to receive in several weeks.

Despite the challenging environment the fund’s A share rose +69bps for the month with contributions from credit and equities respectively +98bps and -15bps in gross performance.  We entered the month fairly defensively positioned and used the initial sell off to add risk, specifically French AT1s.  The scale of the correction was not significant enough for us to materially alter the risk profile of the portfolio however, given some of the issues highlighted above.  We fully expect results season will bring fresh catalysts for some of our holdings, underscoring that this remains a very fertile return-generating environment even without any macro tailwinds and positions us very well for the second half of the year.