March 2021

 “Just because you do not take an interest in politics doesn’t mean
politics won’t take an interest in you.”  Pericles

As we pass the one-year anniversary of lockdowns across large parts of the world we remember Pericles, the fifth century BC Athenian hero who had considerable experience with both pandemics and lockdowns.  Pericles, in the ultimate “rope-a-dope” strategy in the early years of the Peloponnesian War locked all Athenians within the walls of the city rather than directly engaging the Spartans in battle.  In an ironic twist of cause-and-effect from modern day, this strategy served to accelerate a smouldering plague that subsequently killed many inhabitants including Pericles himself, and ultimately contributed in the long run to the Athenian defeat.   Of course the mortality rate of the Athenian plague was considerably higher than what we have experienced today but one cannot doubt that, as in ancient Athens, there will be a long tail of consequences – largely driven by government actions – that will be with us for years to come.

It was otherwise a month that was indeed dominated by politics.  Vaccine-gate (can we officially call it a “gate”?) continued to roll on in the EU, with inoculation numbers lagging and fingers and blame being levied at everyone but those ultimately responsible.  The month closed with a number of countries heading back into lockdown while key leaders were negotiating to secure the Sputnik vaccine from Russia, all of which augurs badly not just for the EU but for the whole region.  In the US the $1.9 trillion COVID relief package was passed spreading largesse far and wide and setting the stage for an even bigger spending plan announced at the end of the month.  Treasuries remained jittery in the face of mixed signals with yields backing up a further 30 bp.  Broader stock markets remained resilient but volatile with sector rotation seeing the SPX outperform in the NASDAQ in anticipation of economic rebound in the US.

Part way through the month European banks came to the rescue of embattled politicians with a pair of failures that diverted everyone’s attention.  First up, Greensill Capital, a trade finance specialist spectacularly failed, ensnaring Credit Suisse most prominently among the banks, and embarrassingly a former politician who in his previous life was more wont to “bash the banks” than shill for them.   But this was only the amuse-bouche for what came later, the failure of family office Archegos Capital, which cost Credit Suisse almost $5 billion and other banks close to that amount in total.  The losses were driven by excess leverage and risk concentration of biblical proportion – hardly new concepts – which caused tremors in both equity and credit markets and led to much tut-tutting from regulators and politicians with calls for investigations, new regulations and inevitably fines.  Of course, one could reasonably ask what new regulation could have prevented this, but one might start by asking whether it is the regulations or the regulators that should be reviewed.   Heads have already rolled at Credit Suisse – which had the worst March since Julius Caesar – and shareholders will once again be on the hook for a fine in addition to losses already sustained. But is this appropriate considering the nature of the failure and the limited influence shareholders have had on bank managements since the financial crisis?  One could make the case that since regulators have far greater influence on management these days perhaps someone within that community might also bear some responsibility for this failure of oversight.  At least one outcome seems certain, having succeeded in using the pandemic to plump bank capital levels in Europe it is very likely regulators will only grudgingly revert to pre-2020 rules.

It was otherwise an action-packed month in financials with a number of significant single day moves.  Overall equities fared better with both banks and insurance indices notching up solid gains, helped by rate moves, while credit and AT1s were mildly lower.  Our portfolio was well-positioned for this and returned +1.8% net, with equities positions contributing +63bps to gross performance.  We used the CS inspired sell-off to selectively add positions but overall remain defensive in light of the current macro environment.  For Q1 the fund returned +3.4% net (Proforma A shares 4.2%).  Looking ahead to Q2 we will once again take our cue from rate markets and the general pace of the economic rebound.  We retain our focus on capital repatriation and domestic consolidation as stress tests come into view later in the quarter and will be sensitive to the fallout from the events of March.