November 2023

“Lettin’ the cat out of the bag is a lot easier than puttin’ it back in.”  Will Rogers

Markets were once again dominated by the outlook for interest rates and the macro-economic outlook in November, with rate markets undoing the previous two months’ swelling yields on softer data – led by US payrolls – strengthening the conviction that “the Fed is done”.  Such price action, not unusual in late-cycle markets, predictably prompted active jawboning by Chairman Powell that the markets should be cautious about anticipating rate cuts.  With signs of economic stress still faint, risk markets were off to races, in an echo of the sugar rush years of QE.  The approach of year end will also have impacted the scale of the move.   For the past few months, the SPX and 10Y yields have moved in an almost mirror image of each other, which should serve up a healthy dose of caution.  We still need to see whether the “Fed put” still exists, but it is worth remembering that if a hard landing is indeed on the horizon, it may not be enough to prevent an equity market swoon.

In Europe the economy is slowing more acutely, with France and especially Germany slowing considerably.  As previously highlighted, we believe the September hike was unnecessary, and at this stage a stronger case can be made that the ECB should be cutting sooner than the Fed.  The jury is still out as to the depth of the downturn, but officials are still on the side of urging caution on inflation rather than worrying about the economy.  Having completely misjudged the inflation phenomenon on the way up they now seem hellbent on misjudging it on the way down.  How does that expression go about “generals always getting ready to fight the last war…”?

It was an eventful month for European banks.  Against the benign macro backdrop UBS announced a massive $3.5 Billion AT1 issuance, which was well received and catalyzed strong interest in the asset class that still has the CS write-off hanging over it.  In addition, both the Greek and Italian governments successfully sold large stakes in bailed-out banks (NBG and Monte Paschi), scooped up by investors looking for value, also buoyed by good results from many institutions.  As a result, the bank equity index rose 7%, with selected smaller banks outperforming.  The rest of the credit sector also rallied, with good performance from a number of middle tier banks that had been slower to recover since March.  For the month the fund’s A shares rose +2.86% with a strong contribution from credit at +324bps gross while equities contributed +7bps.

We expect current momentum to continue into the year end, however early month economic releases will certainly impact – either confirming the trend or catching out a market that has overextended itself in the short term.  From the portfolio’s perspective we believe the new fondness for previously unnoticed deep value securities will drive further outperformance which we will use to trim holdings as targets are hit.  Thus far we haven’t committed to fully extending duration because of long end volatility and attractiveness of existing shorter holdings.  We also reduced our equity exposure after the most recent rally.  As the rates picture unfolds, we will reassess the mix of our securities.