May 2021

Musk: a secreted substance with a strong odour sometimes used to attract wild animals.

The animal spirits were rampant in the crypto markets in May, with traders heeding the call of the bombastic Tesla founder to make digital currencies the tail wagging the proverbial Doge.  Volatility surged to 160% on USD/BTC at one point, buffeted by Musk’s conflicting comments and increasing regulatory scrutiny.  Regardless of one’s perspectives on the value of such instruments their current impact on markets is beyond dispute.  One can recognize the profound transformation taking place in digitizing markets without buying into valuations in the same way that one could understand the impact of the internet while remaining sceptical of the viability of companies such as “Flooz.com” back in the late 90’s.  Perhaps we have no greater indication of how the crypto-miners have captured the current zeitgeist than the amount of time dedicated to them by the talking-heads at CNBC.  Elsewhere, a disappointing jobs report in the US led to a major rethink about rate hike prospects which in turn fuelled a rally in government bonds while broader equity markets were subdued.  In Europe the bumpy road back to full economic reopening continued to wend its crooked path with delays looking increasingly likely, owing to concerning new variants or slow vaccination rollouts.

The financial sector continued to bask in the benign environment of post Q1 results with the SX7E slowly eking its way back to pre-lockdown levels as credit and AT1 securities were fairly subdued.  Speculation continued to mount surrounding upcoming stress tests and the implication for a return to normal rules regarding dividends and share buybacks. Our central proposition remains that at a minimum we will see an end to the blanket ban, and while this is already being factored into valuations there are still a number of interesting plays below the largest tier of banks. Excess capital continues to be a core focus of our positioning in equities as we see potential for buybacks and high dividends ahead for a significant part of the sector, which could lead to an eventual re-rating above pre-Covid levels. In May we also saw one corporate transaction in the insurance sector – Generali announced an offer for Cattolica in Italy – and we continue to believe that more domestic consolidation is likely in the coming months.  Against that backdrop the fund A shares returned 0.8%, with contributions coming primarily from credit positions, accounting for +121bps gross, and equities -27bps.