How we did in December: The fund returned between 1.03% and 0.62% across different share classes, while EUR HY (BAML HE00 Index) returned 0.6%, US HY (BAML H0A0 Index) -0.4% and EM sovereign credit (BAML EMGB Index) -1.7%. Performance in December, gross of fees in EUR, was: (i) Credit: 48bps, with 40bps from cash bonds and 8bps from CDS; (ii) Rates: 19bps; (iii) FX: 6bps, (iv) Equity: 46bps and (v) Other: 0bps.
What we are doing now: Global risk enters 2025 with tight valuations and long positioning across asset classes. Credit spreads are close to 2021 tights and cash levels are low despite sustained inflows. A pickup in rates volatility or an equity market correction may thus hurt credit, particularly given the negatively asymmetric starting point.
The risk-reward in US rates is more balanced than a month ago as the hawkish December FOMC removed the bulk of 2025 cuts from the curve. However, the US curve is still flat by historical standards and is gradually steepening out the five-year point. US policy noise around the new administration inauguration has potential to re-ignite volatility.
Tight valuations and high uncertainty usually mean trouble, and we suspect 2025 will make no exception.
We enter the year with lowest net credit exposure since 2022, off a combination of low net exposure and reduced weight in higher beta segments, such as financials and emerging markets. Our duration is 2.3y. Our yield to call is 5.6%. Our current positioning means we are well placed if a risk correction in 1Q25 materializes and have space to add risk in our cash book in this instance.
More in detail:
The Fund blended YTC is 5.6%.
The Fund duration is now 2.3y, on the low side of our historical range.
We currently run ~14% cash allocation, the highest in the past three years. We hold 43% protection on tight global CDS indexes and single name CDS.
Net exposure in financials (incl. cash short and single name CDS) represents 27% of the book. The asset class outperformed strongly over the past twelve months. We remain constructive but reduce some of the winners.
Net corporates exposure (incl. cash short and single name CDS) represents 34% of the book. We focus on high yielding bonds with limited exposure to market risk and a strong emphasis on catalysts. As a result, GCO corporate exposure has lower beta than corporate indexes and the rest of GCO book.
Net EM exposure (incl. cash short and single name CDS) represents 11% of the book. EM local is currently 4% of the Fund.
*Note indices are used to illustrate the relevant asset class
Financial Credit Strategy
The year ended on a mixed tone with December being very much a tale of two halves split by the FOMC meeting in the middle of the month. Risk assets had been largely positive to stable going into the decision but the perceived more hawkish stance by members led to a bear steepening of the US rates curve. This triggered a knee-jerk reaction across assets and was more evident in the equity space as the dispersion in geographical performance was one of the widest in quite some time.
Whilst European indices held onto their c2% gains, with Italy once again outperforming +2.3% vs UK -1.3%, it was a different picture in the US: the broader S&P fell c2.5%, the defensive Nasdaq rose c0.5%, whilst the Russell sharply dropped c8.5%. Also, there was a sharp reversal across the Financials space with European entities adding c5%, taking YTD to c32%, whilst US peers gave up c7.5% in the month but still ended 2024 ahead with +c37%.
Across the credit space, AT1 spreads once again stood out across other parts of the financials’ capital stack, rallying a further c30bps in December and taking YTD gains to c175bps. The unrelenting hunt for yield in combination with ongoing fundamental amelioration should continue to provide a tailwind for the sector as the incremental pick-up over more traditional credit classes like corporate IG and HY remains attractive from a historic perspective.
European financials should remain in the M&A spotlight as the few ongoing transactions continue to see further progress going into the new year. Italy and UK financials remain the most active on the newsflow front though we could finally see some closure in both Spain and Germany in 2025. Faced with the prospect of lower European interest rates as the ECB attempts to arrest the economic slowdown, some banks’ management teams might be forced to embrace offers as the unfortunate combination of weakening interest income and higher running costs weigh on profits.
Primary activity in December was particularly subdued at just EUR5bn given issuers had been quite active coming into the end of the year. Compared with 2023, capital issuance last year was c50% higher whilst funding in the secured format contracted c40%. Considering that over the past 5 years, secured debt has accounted for roughly half of European financials primary, it will be interesting to see this year how issuers adapt to less attractive levels in this format.
Global Credit Strategy
How we did in December: The fund returned between 1.03% and 0.62% across different share classes, while EUR HY (BAML HE00 Index) returned 0.6%, US HY (BAML H0A0 Index) -0.4% and EM sovereign credit (BAML EMGB Index) -1.7%. Performance in December, gross of fees in EUR, was: (i) Credit: 48bps, with 40bps from cash bonds and 8bps from CDS; (ii) Rates: 19bps; (iii) FX: 6bps, (iv) Equity: 46bps and (v) Other: 0bps.
What we are doing now: Global risk enters 2025 with tight valuations and long positioning across asset classes. Credit spreads are close to 2021 tights and cash levels are low despite sustained inflows. A pickup in rates volatility or an equity market correction may thus hurt credit, particularly given the negatively asymmetric starting point.
The risk-reward in US rates is more balanced than a month ago as the hawkish December FOMC removed the bulk of 2025 cuts from the curve. However, the US curve is still flat by historical standards and is gradually steepening out the five-year point. US policy noise around the new administration inauguration has potential to re-ignite volatility.
Tight valuations and high uncertainty usually mean trouble, and we suspect 2025 will make no exception.
We enter the year with lowest net credit exposure since 2022, off a combination of low net exposure and reduced weight in higher beta segments, such as financials and emerging markets. Our duration is 2.3y. Our yield to call is 5.6%. Our current positioning means we are well placed if a risk correction in 1Q25 materializes and have space to add risk in our cash book in this instance.
More in detail:
*Note indices are used to illustrate the relevant asset class
Financial Credit Strategy
The year ended on a mixed tone with December being very much a tale of two halves split by the FOMC meeting in the middle of the month. Risk assets had been largely positive to stable going into the decision but the perceived more hawkish stance by members led to a bear steepening of the US rates curve. This triggered a knee-jerk reaction across assets and was more evident in the equity space as the dispersion in geographical performance was one of the widest in quite some time.
Whilst European indices held onto their c2% gains, with Italy once again outperforming +2.3% vs UK -1.3%, it was a different picture in the US: the broader S&P fell c2.5%, the defensive Nasdaq rose c0.5%, whilst the Russell sharply dropped c8.5%. Also, there was a sharp reversal across the Financials space with European entities adding c5%, taking YTD to c32%, whilst US peers gave up c7.5% in the month but still ended 2024 ahead with +c37%.
Across the credit space, AT1 spreads once again stood out across other parts of the financials’ capital stack, rallying a further c30bps in December and taking YTD gains to c175bps. The unrelenting hunt for yield in combination with ongoing fundamental amelioration should continue to provide a tailwind for the sector as the incremental pick-up over more traditional credit classes like corporate IG and HY remains attractive from a historic perspective.
European financials should remain in the M&A spotlight as the few ongoing transactions continue to see further progress going into the new year. Italy and UK financials remain the most active on the newsflow front though we could finally see some closure in both Spain and Germany in 2025. Faced with the prospect of lower European interest rates as the ECB attempts to arrest the economic slowdown, some banks’ management teams might be forced to embrace offers as the unfortunate combination of weakening interest income and higher running costs weigh on profits.
Primary activity in December was particularly subdued at just EUR5bn given issuers had been quite active coming into the end of the year. Compared with 2023, capital issuance last year was c50% higher whilst funding in the secured format contracted c40%. Considering that over the past 5 years, secured debt has accounted for roughly half of European financials primary, it will be interesting to see this year how issuers adapt to less attractive levels in this format.
Financial Equity Strategy
Sustainable Equity Strategy