September 2026

“I have always had a certain idea of France.”  Charles de Gaulle

While the focus was on the southern nations (primarily Greece) during the European sovereign debt crisis of the last decade, it has always been our belief that the greatest revelation of that period was that France was ultimately not part of the solution but rather part of the problem.  After having walked hand in hand (literally) with Germany as the anchors of the European Union through the foundational years, the fatal conceit at the heart of the single currency was blown apart by the Global Financial Crisis that crippled so many European banks and morphed into the sovereign debt crisis.  In the end, old-fashioned money printing and a largely German-funded bailout carried the day, as France, with its deteriorating finances entered a period of political instability that prevented even the mildest reforms from being enacted.  September’s riots and protests were a timely reminder that next year’s presidential election could be the most consequential in recent memory, particularly if the two extreme candidates make it to the runoff.  With both sides vehemently opposed to fiscal reform – one has openly proposed cancelling debt – then last month’s volatility is a bitter foretaste of what’s to come.  To be sure, we’ve seen similar situations in previous elections albeit in less febrile times, and the establishment still has the time to pull a rabbit out of the hat, but it’s unlikely this will make it easier to address the conditions underlying the problems, and if they’re unsuccessful then the situation could tres vites degenerer!

This has all been going on against the familiar backdrop of higher rates and anxious markets – both the ECB and the Fed raised rates by 25 bp, but increased bond market volatility has been the bigger driver of uncertainty.  With no major government remotely interested in showing fiscal restraint at the moment, the case remains for more increases, at least in the US, where the economy is outperforming its peers.  But given the increased levels of leverage underpinning much of the CapEx behind the key sectors driving growth, markets are starting to feel more fragile, even if upcoming Q3 results remain positive.  The search for the elusive tipping point when debt burden starts to weigh on valuation is the big question, one that remains difficult to answer at the moment, but at some point it will.

One key difference with the last sovereign debt crisis is the health of financial institutions, which are now well capitalized and will not be an incremental burden on the system.  That won’t mitigate the bumpy ride that might lie ahead, as we saw with French banks in September, but the presence of healthy intermediaries will help cushion any short-term disruptions in credit markets. On the other hand, at this stage we don’t yet know if the lessons of Silicon Valley Bank were learned, but our view is that we’re likely to see pain over the coming quarters as portfolio valuations reflect large negative mark-to-market losses, although it may not rise to existential levels for any institutions.

All of this adds up to a strong likelihood of significant disruption in the very near future.  The combination of risk factors makes it highly unlikely that policy makers can thread the needle to some happy soft landing without inflicting pain on economies, and given risk concentrations and valuations, there is no other silver bullet solution.  October will bring fresh data and quarterly results, which for the banks should remain solid if uneven.  The November mid-terms and the Gulf conflict add additional layers of uncertainty, but their outcomes are unlikely to decisively drive markets.

For September, the fund’s A shares lost -0.32% with contributions from Fixed Income of -0.32% and equity of -0.01%.  Our overall defensive positioning has been consistent with our view, and with time our conviction grows that the opportunities that will emerge in the coming months will create a bountiful investment environment.