May 2026

“The Holy Roman Empire is neither Holy, nor Roman, nor an Empire.”  Voltaire

And so to May, a new month with the same old concerns about interest rates and their impact on asset prices, with the attention shifting to Europe ahead of the ECB’s next meeting in early June.  Faithful readers will know that we have been in the camp of “one and done” with respect to expected rate hikes, but the consensus is still looking for more given that inflation rates remain too high, at least for the Teutonic wing of the ECB council.  Our belief in limited tightening is based on several factors.  First, the generally weak economic growth seen primarily in core western European countries will undoubtedly have a dampening effect of inflation in the future.  Second, the energy price spike will eventually work its way through the system, and its inflationary effects will abate, but likely have limited stimulative effect on growth given overreliance on out-of-favour sectors in manufacturing.  And having regulated itself out of the AI capex race the EU can only watch the global boom from a distance.  Lastly, the political environment is far from settled, with contentious 2027 elections in France and a wobbly coalition in Germany limiting the ability to generate a consensus on important issues.  Against this collective backdrop it is difficult to see a politically sensitive central bank commit to an aggressive tightening path, and one should discount heavily any aggressive language used to accompany the hike.

Markets were mostly positive but jumpy throughout the month, driven primarily by tech stock gyrations and government bond yields.  Too much has been written about where in the AI “Bubble stage” we’re at, but it’s worth remembering Warren Buffet’s adage that “interest rates are to stock prices as gravity is to the apple”.  We are likely to have a better sense of risk market performance by observing long term interest rates than trying to speculate on what measure of valuation will prove to be a step too far.  Bank equities in Europe continued to be well supported, with speculation growing about consolidation and expectations about reasonable Q2 results offsetting any lingering concerns about credit provisions.

Given the environment our portfolio has been relatively quiet and stable.  Our preferred strategy remains to continue raising liquidity and retaining flexibility rather than committing one way or the other at this stage.  For the month, the fund’s A shares rose +0.57% with contributions of +0.70% from credit and -0.08% from equities.