Ahead of the Curve | Friday, 9th April 2021

Webinar on Outlook for Financials.
Please join us on 13^th April at 14:30 BST for a webinar with Mark Conrad (Portfolio Manager) and Simon Peters (Investment Strategist) to discuss the current environment and outlook for the global financial sector. They will offer their views on the investment drivers and opportunities presented during a 30-minute session, before opening for a Q&A. Register here.

Asia chasing the US in economic upgrades – Despite less fiscal policy and vaccination progress.
With the burst of fiscal stimulus and progress on vaccination rollout, the US has been on the receiving end of economic growth optimism for the last few months as GDP growth expectations for 2021 have been revised up by 1.69% YTD. The Asia-Pacific region has also seen broad-based GDP upgrades as well – China, India, Japan, South Korea and Australia have seen 2021 growth expectations rise by 0.54% on average YTD. And unlike the US, where the Fed has promised not to hike rates until 2023, we see markets pricing in rate hikes within a year for China, India and South Korea. In recent weeks we have been growing our exposure to the region, specifically in names where valuations do not reflect the strong outlook and rate optionality has been mispriced.

Archegos saga further evidence of risk being pushed outside of the banking sector since GFC.
The sudden collapse of Archegos Capital has for the third time in the past year drawn scrutiny to the topic of leverage in the hedge fund sector (the first being the near-implosion of fixed income relative value funds at the onset of the pandemic last year, and the second being the 50% loss suffered by Melvin Capital in January due a retail-driven short squeeze). Recent headlines have focused on the egregious losses incurred by Credit Suisse due to its exposure to Archegos via margin lending. However, what hasn’t received as much attention is the fact that a fund with more than twice the AUM of Long-Term Capital Management collapsed in less than a week, without any government intervention, with minimal impact on broader financial markets, and with no systemic issues created in the financial system. While there is no excuse for their poor risk management, Credit Suisse does appear to be the victim of a failed attempt at coordinating the wind-down of Archegos’ positions without creating a fire sale – precisely what the Fed did when it stepped in to forcibly organize a bailout of LTCM in 1998 to avoid creating losses throughout the financial system. It is notable that no bank supervised by the ECB or Fed suffered significant losses this time despite the lack of coordination. To us this is further evidence of the resiliency embedded in the post-GFC regulatory regime – having already proven itself during the depths of the pandemic last year.