November 2021

“I respect his independence, however I hope that independently he will conclude that my views are the ones that should be followed.” 

President Nixon, on the appointment of Fed Chair Arthur Burns.

November’s dominant themes were a continuation of issues that have been top of mind for the past several months, most notably inflation, central bank policy and COVID related developments.  Starting with inflation, data across all economic zones registered strong gains in November, further stretching the credibility of the word transitory.  By the end of the month Fed chair Powell, with his renomination secured, finally conceded what everyone already knew (including Fed officials):  that inflation had proved to be more persistent than expected and therefore QE tapering would begin sooner than expected, which in turn set off a brief market panic.  The situation in Europe was similar with German inflation touching levels not seen since the post-unification period of the early 90’s, although the likelihood of tightening credit conditions there appears to be remote for the foreseeable future.  At this stage it is useful to remember that in the wake of the global financial crisis rates remained anchored to zero for seven years, and although the circumstances this time are very different readers may recall that back then there always seemed to be a reason to delay lift off.  Already we’ve seen new COVID variants contribute to policy pauses and the latest – Omicron – has already spawned much chin stroking and hedging by BOE officials ahead of upcoming meetings where a hike in official rates seemed a likely outcome only a few weeks ago.  And as far as the Fed goes what is true fifty years ago remains just as relevant today.

As a result, markets were quite volatile in November dominated by USTs, which finished unchanged after having been 20 bp higher earlier in the month.  Curve shape was also quite volatile in response to news of the accelerated timeline for tapering and macro funds were once again caught offside, which further exacerbated price swings.  Risk assets also suffered as the SPX gave up a 3% gain to end the month down about 1% while the European banks index lost almost 9%.  As mentioned, earlier Europe is at a different point in the rate cycle and the ECB has already taken hikes off the table in 2022 with questions remaining about the extent to which QE will be scaled back next year.  Several economies have taken a backward step as COVID restrictions were reinstituted which also contributed to softness in markets, but fundamentally the core narrative remains for continued economic improvement over the coming months.

Against this backdrop the fund’s A shares dropped 1.7%, a disappointing result considering our overall defensive positioning and driven mainly by underperformance in one of our key equity holdings post Q3 results.  We believe results were misjudged and have reaffirmed our belief in the outlook over the next six months.  Otherwise, we used the opportunity of market volatility to selectively add risk. Overall, credit had a negative -118bps contribution to the Fund’s gross performance, versus -80bps for equities. The run in to year end will largely be driven by the seriousness of government response to the Omicron variant given that the Fed’s tapering news is already in the market.  If the worse case scenario fails to materialize then a reversal of the recent correction is likely and, in our view, we should be well placed to take advantage of a trend that is likely to continue into the new year.