January 2026

“What we need is a good recession.” Cover, The Economist, July 1, 1989

In the summer of 1989, markets were basking in the seventh year of a post-recession boom. But as is often the case during the late-stage of growth, world markets were also riddled with excesses. Tokyo stock market capitalization was almost 50% bigger than the NYSE, world-wide, property bubbles were inflating driven by plentiful credit, often from unregulated lenders and inflation, which had fallen dramatically since the beginning of the decade was once again rearing its head. All this while the fiscal bomb of German unification was still a year away. Of course, we now know what happened. Rates were either raised or kept high to constrict inflation, which in turn prompted defaults in overleveraged asset markets. As a result, the US Savings and Loan industry collapsed as part of a nationwide commercial banking crisis, and the ensuing credit crunch (across most major markets) led to a recession that allowed for a reset of the whole system. And with recession the inflationary dragon was well and truly slain, ushering in a period of benign price pressure for almost a generation. This set of events, or versions very similar, are present at the death and rebirth of almost every economic growth cycle.

So, is this relevant today? Possibly. Equities have had a remarkable run, particularly in certain sectors that are in the middle of a capex boom that is fraught with risk of overspend, leverage and easy credit are once again plentiful. Inflation, while lower than it was two years ago still lies fallow, threatening to return because the lords of fiscal and monetary policy have become addicted to using their tools to fight every setback, regardless how small, as if it were existential.Does that mean a recession in the near term is inevitable?No, but at some point, the trade-off supporting every economic policy decision will tip towards sacrificing growth, and the consequences for the markets will be considerable, given the state of government finances in most large economies, and the fact that voters have grown accustomed to an increasingly unsustainable “safety net”. Enjoy the good times while they last…

It was a mixed month in markets, with a traditional January surge to start followed by softening.A speculative surge in commodities and other pseudo-currencies that would make the Hunt brothers blush was driven by the view that current US policy makers are ambivalent about the value of the USD and uncertainty about the direction of monetary policy.At the same time, the view that the next move in rates will be up is gaining credence, so the likelihood of continued volatility seems inevitable. Other economic data is less definitive, and until a trend emerges we will likely be vulnerable to any item that doesn’t support the current narrative.

Within the financial sector, US banks posted generally strong results (as expected) and the read across to Europe was supportive of bank equity prices. Credit markets were confined to a relatively narrow range and given the general tightness of spreads the impact of events (corporate actions, macro) becomes more important. The fund’s A shares posted a gain of +0.96% with contributions from credit of +116bps and equity of -2bps on a gross basis. Our approach at this stage will come as no surprise to faithful readers. We had limited turnover of our portfolio, and our focus remains on retaining flexibility as the year unfolds.