January 2021

“He who sells what isn’t his’n, must buy it back or go to pris’n.”
Daniel Drew, 19th century stock operator

January got off to an auspicious start as most of Europe was pushed back into lockdown very early in the month, dampening sentiment which had been given a boost by vaccine test successes and rollout.  It was an otherwise eventful month with a civil war erupting in equity markets as monstrous short squeezes in several stocks sparked volatility across all asset classes and dominated the commentariat. US banks’ earnings came overall ahead of expectations, but stock prices displayed disappointing reactions. Common themes were low provisions and better trading revenues than anticipated, showing a favourable outlook for European banks’ CIBs.  Elsewhere, political turmoil in the US and Italy contributed to the lacklustre performance, with the SPX losing 1.1% after having rallied in the first part of the month, while government bond yields rose for the first time in a long while, perhaps a sign that the reflation trade is slowly being priced into rate markets.   In a small consolation we were spared the endless stream of bromides and platitudes normally thrust upon us at this time of year by the Moncler-clad chattering classes at Davos.

The European banks index was particularly rattled, having rallied at the start of the year only to lose it all and then some on the Italian news and hedge fund liquidation to finish down 3.5%.  With earnings season approaching there were few fresh catalysts to counter the macro factors and many securities drifted.  Against this backdrop the fund lost 0.2% as gains in credit (0.75%) from two idiosyncratic positions were offset by equity volatility.

Looking forward February will bring a wave of Q4 results and with it more clarity on the state of pandemic related provisioning and balance sheet health.  Given our focus on the twin themes of consolidation and capital repatriation we will be alert to signs of renewed interest in domestic consolidation and management intentions regarding dividends and buybacks.  Our intent remains to use strong markets as an opportunity to reduce risk.