April 2021

“Inflation is the one form of taxation that can be imposed without legislation.”
Milton Friedman

Both inflation and taxation came to the fore in April as data continued to confirm that recent efforts at monetary stimulus have manifest themselves in higher inflation prints.  In the US monthly PPI showed a 1% increase while the Bank of Canada forecast a near-term peak at the top of their range, prompting them to begin a gentle taper of bond purchases and bring forward the timing of expected rate hikes.  Bond yields took this in their stride, trading in a fairly subdued range for most of the month.  On the taxation front the Biden administration unveiled comprehensive plans to raise both corporate and individual tax rates and Treasury Secretary Yellen began a campaign for a global minimum corporate tax rate to avoid a “race to the bottom” among developed economies, a bizarre assertion that the fiscally responsible should follow the spendthrift in taxation policy.

What also emerged in April were signs that the long awaited fiscal wave is finally upon us.  Following on from last month’s COVID relief package talk in the US shifted to additional trillions to spend on infrastructure (with a very expansive definition of infrastructure).  Meanwhile in Europe the first spending plans of the EU’s recovery fund were submitted to Brussels by Italy and Greece and as expected the words “green” and “digital” featured prominently, with promises of the greatest economic transformation since the Mycenaean Age.  Of course one does not need to be a Delphic oracle to predict that centrally directed projects combined with sclerotic bureaucracies might not yield the expected GDP multiplier effect, but time will tell.  One thing is certain, in the short run equity markets will love it, and that was reflected in the SPX, which rallied 5.2% while the STOXX 600 added 1.8%. Optimism could also be seen in Euro rates and the 10-year Bund reached a new wide at -20bps. Euro banks stocks in turn got the double benefit of the risk-on tone and wider rates, and the Euro Stoxx Banks index gained +4.6%.

News flow in the European financial sector continued to be dominated by fallout of Archegos Capital collapse.  Total losses continued to grow – north of $10 billion at last count – and new names were added to the casualty list (UBS and Morgan Stanley) while others increased losses considerably (Nomura).  The extent to which “FOMO” is still rife in investment banking has been one of the key revelations in this saga and should serve as a warning bell for managements of second-tier banks.  To lose this much money on such banal risk is eye-opening.  For so many banks to be caught out by this in 2021 is downright frightening and a sign of just how much work still needs to be done in restructuring these units.  The time is ripe for difficult decisions about scaling back and exiting rather than expansion.

Elsewhere in sector news the focus was on Q1 earnings, which were generally positive on provision write-backs and the buoyant capital markets environment.  As previously mentioned stocks performed well while AT1s returned +1.2% and credit securities lagged as rate fears impacted fixed income markets.  Against that backdrop the fund gained 1.4% net as our single-name credits outperformed with AT1s contributing +165bps of gross performance, and we took advantage of the strength to reduce risk.  We remain cautious about the potential for macro shocks but continue to see opportunities driven by the twin themes of capital repatriation and consolidation.  In April we saw a successful bid by Credit Agricole to acquire Credito Valtellinese, a sure herald for further transactions.