January 2025

“And what is the use of a book,” thought Alice, “without pictures or conversations?”

The new year began just as the old one ended, with European leaders seemingly flummoxed to deal with the myriad of problems their policies have exacerbated while watching a bonfire of regulations (and government by legislation) across the Atlantic.  Just as the animal spirits are being unleashed in the US, the major European economies continue to sputter under the weight of regulation, taxation and the green agenda, while policy makers respond flaccidly to these (and other) challenges.  In the UK, the last Budget’s “war on growth” has given way to a “push for growth”, but rhetoric doesn’t carry the same weight as legislation, and so one shouldn’t look at this as a course correction, but rather spin.  In the meantime, the government’s popularity has fallen faster than Eddie the Eagle on a ski jump.  Not to be outdone, the self-immolation of German politicians in the run up to February’s elections has been something to behold, with even “Mutti” Merkel jumping in to stir the pot and remind voters of what they’re missing since she decided she’d done enough damage and retired.  The only bright spots are the peripheral economies, standing above the continent in a way that hasn’t happened since togas were a hot fashion item.  But this alone will not sustain Europe.  With the gap vs the US in economic trajectory never having been wider, Europe (inc UK) now stands at a crossroad and must decide which path to take.  To be sure, it won’t be all sunshine and roses for the US if they don’t get their fiscal house in order, but on the present course it’s going to be a very long four years ahead.

In the meantime, markets reacted with a mix of expectation of policy changes and reaction to economic data.  With US data continuing to show strength equities rose while yields were flat, having spiked mid-month.  Going forward, continuing strength will limit future rate cuts unless inflation slows dramatically, an unlikely prospect in the current environment.  On the other hand, the ECB cut rates by a further 25 bp but still looks at risk of falling behind the curve given recent soft data.  One bright spot in Europe was the performance of bank equities, with the index rising 10% following US banks, which rose after strong Q4 earnings reports and auguring well for upcoming results next month.  Credit spreads also tightened and are now priced for a continuation of the Goldilocks environment, which seems appropriate for the moment.

For the events, the fund’s A shares rose +1.98% with credit positions contributing +188bps and equities +43bps in gross performance.  Given the relatively compressed levels of risk premiums, we are concerned that the market is susceptible to bouts of volatility and so we retain a great deal of flexibility in our portfolio to react to adverse market moves.  We continue to find idiosyncratic situations with skewed risk/return profiles that are not dependent on macro events, and these remain our focus.  February will bring results season for European banks and a greater clarity of where US economy policy, and as Alice might have said it will be certainly be “curiouser and curiouser”.