February 2021

“It’s loads of fun and paper, printed paper, flimsy stuff – do they still call it money?”
Klaus Mann, 1923 Weimar Republic

February saw divergent moves in markets as equities shook off higher interest rates to finish strongly, in what will surely be a recurring theme for the balance of the year.  Picking up where they left off last month, US Treasuries surged by over 30 basis points as the reflation trade gathered pace in the wake of advanced stimulus negotiations and continued success of vaccine rollouts.  In response Fed officials were balanced in their commentary, highlighting that better economic news was driving market yields, while reiterating that official rates were going nowhere for quite some time.  No one doubts the Fed’s resolve to be accommodative and that their tolerance for being “behind the curve”, on inflation would make even Arthur Burns blush.  The question is how will long-term yields behave in the face of growing economic momentum that will likely accelerate with additional fiscal support, and at what stage do “lower forever” inspired trades start to unravel?

European markets found themselves in a delicate situation as a result, with government bond yields being pulled higher despite lagging economic performance and delays to vaccine performance.  This prompted enough concern for ECB officials to flag further measures (of questionable efficacy), as a potential response to such pressures.  In the mean-time financials equities performed very strongly off the back of generally well received Q4 results which showed strong capital build and lower than anticipated provisions, while credit markets saw strong first half performance wiped out by the rates move.  Against this backdrop the fund gained 1.87% net with our equity positions contributing 1.59% of gross performance.

Faithful readers will recall that the twin themes of capital repatriation and domestic consolidation have played a big part in our portfolio construction and, while these remain important, we believe that the focus will be on the broad reopening of economies and improving data as we enter the tail end of Q1.  There will also be a budget announcement in the UK and a climax in US stimulus discussions, both of which are likely to feature “jam today, cold beans tomorrow” provisions, which will certainly be supportive to risk markets.  Of course, the threat of higher rates will continue to loom and therefore we expect to use strength to reduce risk and await further clarification of trends.