April 2023

“What we do in life echoes in eternity.”  Maximus Decimus Meridius

Events in April were dominated by the echoes of the March bank meltdowns, as First Republic stumbled toward a climactic demise at the end of the month while other regional banks continued to tighten liquidity and investors anxiously unloaded bank preferred stock.  In Europe, there was diminished talk of potential contagion and partial recovery of AT1 securities, but overall, an air of uncertainty pervaded.  To nobody’s great surprise the first salvo of what will ultimately be a barrage of lawsuits was filed against the Swiss authorities seeking to overturn the decision to wipe out CS AT1s.  Meanwhile, regulators and legislators used the opportunity to call for “tougher regulations”, without actually specifying what rule could have prevented the March debacle or why the existing rule book wasn’t enforced in the first place.

Elsewhere, there were growing signs of a slowing of economic momentum.  Jobs were added at a more moderate pace while the regional bank crisis was having a chilling effect on lending.  While nothing emerged to upset the current consensus of a soft landing, government bond markets continued to price easier monetary conditions later in the year.  The Fed is widely predicted to reach its first pause in May after adding one more hike, with the Europeans following closely behind.  If that pause is to then become an easing cycle it will take a considerable deterioration in economic data over the coming months, or the emergence of a credit crunch.  Absent that, the government bond market has got too far ahead of itself.

April also saw the first releases of Q1 bank earnings, with the large US institutions leading the way with strong performances across most metrics.  Within the investment banks markets businesses thrived in the volatile environment while primary and advisory businesses lagged, which led to another round of layoffs, continuing the unwind of the ill-conceived, post-SPAC hiring binge.   This was largely replicated by European banks as NIM expansion and capital accretion buoyed equity prices and tightened credit spreads for reporting institutions.  Significantly, Unicredit called one of its AT1s, which went some way to reassuring a market in need of support.  May will bring remaining results, which we expect will confirm the overall strong performance by the Europeans.

Notwithstanding markets’ skittishness the fund’s A shares registered a 2.1% gain for the month, recovering some ground lost in March as credit contributed +172bps in gross performance and equities added +39bps.  We continued to take advantage of market volatility to add selectively to our existing positions.  With next month’s earnings results we would expect to see supportive data for our portfolio and we will take advantage of opportunities created to adjust accordingly.