May 2025

“And the problem that we’ve gotten into in recent years is spending programs with borrowed money, tax cuts with borrowed money, and…that proves disastrous.”  Alan Greenspan

With no fresh calamities markets were forced to deal with the increasing banality of the current economic reality, which means growing concerns over deteriorating public finances on both sides of the Atlantic.  With good reason, as politicians of all stripes are proving the old adage that no government ever voluntarily shrinks in size, or meaningfully fund new spending.  When it comes to government finances we are living in uniparty world, where the significant entitlements that consume increasingly large segments of budgets go untouched, and while big revenue raisers like VAT increases or user fees are shunned because they hit the most voters.  At this point who would be brave enough to unwind this, given the people’s unwillingness to accept economic reality? Unfortunately, an analysis of the past would suggest that these scenarios never get resolved without a major crisis happening first.  But in the meantime there are consequences to be dealt with.  Central banks are increasingly highlighting stalled inflation data as reason to pause interest rate cuts, while long term bond yields uneasily drift higher.  In May, Moody’s joined its major competitors in stripping the US of its Triple A debt rating, not new information, but a clear sign of the times.  Risk markets can continue unaffected for some time, but eventually debt matters, and while a global sovereign debt crisis is a remote possibility, rising rates will threaten economic stability and markets.

During the month however, market sentiment was more influenced by news of trade deals and tariff reductions/postponements and equities rallied strongly with the SPX +5% with similar performances in Europe.  Of note, the USD weakened markedly over a combination of the debt concerns and European economic stabilization, a development which will impact inflation figures in the coming months.  As widely expected, the BoE cut rates by 25 bp, but as with other central banks, the outlook beyond the immediate future looks less predictable for the first time in a while.  While economies are settling at lower levels of activity but with no recession imminent it seems like we are entering a period where a modest positive vibe will be underpinning asset prices.

European banks had a strong month as equities rallied and credit spreads tightened, continuing the recovery from mid-April lows.  Aside from continued support from earnings reports, talk continues to circulate about regulatory rollback.  Faithful readers will know that we remain sceptical about the scale of any such reform, but the fact these considerations are taking place is a good measure of how much the sentiment for the sector has improved in public circles.  Another catalyst remains potential consolidation within the sector, and while very few deals have actually taken place, there are a number of open bid situations.  Unicredit announced it increased its stake in Greek bank Alpha, raising questions about whether a full acquisition might take place in the future.

With this constructive environment as backdrop, the funds A shares rose 2.98% with credit contributing the most at +263bps gross, while equities contributed +80bps.  As previously outlined, we have used recent strength to reduce overall exposures, particularly equities, while maintaining our focus on idiosyncratic situations, of which there remain substantial opportunities.