November 2024

“Meet the new boss, same as the old boss.” Roger Daltrey

After years of waiting and prognostications of doom, the US presidential election came and went, and the next day, against all odds, the sun still managed to rise in the East. Almost immediately markets moved to extrapolate the impact of potential policy choices, and equities rallied strongly while Treasury yields rose 15 bp, reflecting the consensus view that a pro-growth/fiscally loose approach will prevail in the new administration. Of course, what is somewhat lost in that analysis is the fact that these policies are tautological and conflicting at the same time. A continuation of the recent (since the Global Financial Crisis) vogue of debt-financed spending regardless of underlying economic conditions will drive equity prices higher. But, with a debt/GDP ratio of 120% and the prospect of higher interest rates the inevitable collision with a debt sustainability crisis could materialize much sooner than a complacent market expects, and the consequences will be Bigly painful.

While the US election dominated the headlines there was considerable activity elsewhere. As expected, the Fed and BoE each cut rates by 25 bp without much fanfare while economic data continued to show sluggish performance in Europe while US data releases were impacted by recent strikes and hurricanes but were otherwise resilient. There was nothing to change the prevailing narrative that we are probably nearing the end or at least a pause of the easing cycle barring an unforeseen shock in the US. However, we fully expect the ECB still has greater scope to cut given soft growth and better progress on inflation, and that it is more likely to be front loaded over the next six months, albeit in a manner consistent with its more consensual process.

Elsewhere in Europe, the drama of European bank M&A continued to simmer as UniCredit (UCG), after being rebuffed in its attempt to acquire Commerzbank turned its attention to a domestic target, Banco BPM, and launched an unsolicited takeover offer. Banco BPM, which lists Credit Agricole as its largest shareholder, rebuffed the interest, but this situation is far more likely to yield a merger than the original cross-border fantasy. We have long been advocates of domestic banking consolidation and believe synergy-driven savings offer the best source of sustainable value creation for the sector, especially since the best days of NIM expansion are probably in the rearview mirror. Still, if this turns into an unseemly bidding war then the only winners will be the target’s shareholders, and the ensuing public fallout will put paid to future tie-ups. Note to bank CEOs: there are plenty of attractive mid-sized banks to look at, it’s probably not worth all chasing the same one…

While US equity markets retained their strength through the month, European bank shares had a challenging month in the face of clear market repositioning ahead of the aforementioned rate cuts, while credit markets were mixed. Late month budget drama in France also added to the uncertainty and contributed to the general risk reduction. Against this backdrop the fund’s A shares rose +0.29% with credit contributing +64bps in gross returns while equities lost -27bps. Our portfolio did not change appreciably in November, reflecting our view that given current levels of risk premia and expected market behaviour the best opportunities remain very specific, idiosyncratic situations that are tailor-made for a fund of our characteristics. Looking ahead to December we fully expect to see some 2025 pre-positioning, but we believe that the new year is unlikely to bring a clear trend one way or the other.