May 2022

“Inflation is the parent of unemployment and the unseen robber of those who have saved.”  Margaret Thatcher

In May central banks swung into action as the Fed raised interest rates by .50% while the Bank of England moved by .25%.  Both moves had been widely expected.  While inflation remained elevated concerns started to shift towards slowing growth and the first serious signs of recession risk, which now seems very likely in 2023.  In the meantime, a number of governments sought to introduce fiscal support measures to overcome consumer price hikes, putting more paper money in the hands of those who have suffered because of declines in the value of their…er…paper money.  Elsewhere, legislative price caps were mooted in the US Congress, oblivious to the deleterious impact these have had elsewhere, while there was little sign that many of the structural issues underpinning current problems will disappear quickly.

Volatility continued in markets, with crypto assets leading the way as BTC fell 18%, which then spilled over into technology assets.  In the meantime, USTs treaded water while in Europe German bond yields rose .15%, with peripheral spreads widening in anticipation of the upcoming ECB meeting where rate policy and bond buying programs will be discussed.  European financial equities bounced in May against the trend, while credit underperformed, continuing recent trend.  Against this backdrop the fund’s A shares dropped -2.04%, largely driven by declines in credit assets due to the underperformance of second-tier names, despite fairly defensive positioning.

Looking forward current volatile conditions will likely be with us until we get clarity on pace and scope of rate hikes and the impact on market positioning.  As mentioned previously, it is our view that the degree of tightening required to tip the economy into recession – at least in Europe – is not significant and therefore risk of credit market overshoot is high.  Equally, one must not underestimate the potential scale of the market adjustment taking place with the reduction of excess liquidity.  We plan to remain defensive while tactically managing exposures going into the summer months.