August 2025

Vigilante: any person who takes the law into their own hands.

There was an absence of fireworks last month despite several smouldering macroeconomic and geopolitical situations.  The relative calm owes more to the fact that it was August, rather than any sense of confidence in current leadership to resolve these outstanding problems.  While economic data showed increasing softness – the BOE somewhat contentiously cut rates by 25bp – inflation remained elevated, and there was a growing unease with the general state of public finances.  It’s this last element that could turn out to be the biggest risk to stable markets in the months ahead.

For some time now we’ve known that the Bond Vigilantes are lurking, biding their time before passing judgement on the parlous state of the UK’s fiscal situation come budget time.  Recently, there‘s also been a growing concern about France, given its currently political disfunction and deteriorating fiscal position.  In both cases political challenges are standing in the way of badly needed reforms, but it seems markets will need to move into crisis mode before we see any sort of resolution.  Gilt yields are well above levels reached in the October 22 Mini-Budget meltdown, while French yields have risen above Italian yields, a situation not seen since Julius Caesar defeated Vercingetorix.  With the US Treasury market also showing signs of impatience with the bipartisan tendency to increase the debt at any cost, we will soon return to a time where the machinations of the US government bond market become the most important factor driving all markets, and the current complacency receives a rude awakening.  It’s worth noting that in the event that slower growth leads to rate cuts it’s unlikely we’ll get a respite, as there will be pressure once again to increase stimulative spending and yield curves could be prohibitively steep.  Not a pleasant backdrop for risk assets.

In European financials recent trends continued into August.  Both equity and credit securities remained well-bid at recent highs, which seem accurate reflections of where sector fundamentals stand at the moment.  With results more than a month away, attention remains focused on the consolidation story, although thus far there hasn’t been very much to talk about.  Between government intervention in Spain and CEO adventurism in Italy, the prospect for meaningful consolidation seems very unlikely.  And so, M&A bankers and financial commentators will have to content themselves like Vladimir and Estragon and wait…

For the month, the fund’s A shares rose 0.99% with contributions from credit of +119bps and equity of -3bps on a gross basis.  We have remained nothing if not consistent, and our recent focus has generally been on harvesting of positions and repositioning on higher quality/low beta securities.  Given our previous comments about the general level of the market and the sense of complacency we are not particularly drawn to make major commitments at present but prefer to retain maximum flexibility in the portfolio.