How we did in February: The fund returned between 0.9% and 1.6% across different share classes, compared to EUR HY (BAML HE00 Index) 1.0%, US HY (BAML H0A0 Index) 0.7% and EM sovereign credit (BAML EMGB Index) 1.3%. Performance in September, gross of fees in EUR, was: (i) Credit: 1.24%, with 21.27% from cash bonds and -3bps from CDS; (ii) Rates: -5bps; (iii) FX: 1bps, (iv) Equity: 13bps and (v) Other: 0bps.
What we are doing now: February was an eventful month, marked by significant macroeconomic data, elections, and geopolitical headlines. Credit markets performed well, anchored by strong flow creating a ‘structural bid’ for credit. A lack of sellers and tepid issuance in HY continue to push secondary stronger.
However, we believe uncertainty and macro risks are becoming harder to ignore. Mixed macro data and policy uncertainties are weighing on sentiment. Citi’s economic surprise index fell from +40 in November to -16 recently, with consumer sentiment, ISM, PMIs, housing starts, and factory orders missing expectations. Tariff headlines are likely to continue, with markets’ interpretation of said tariffs shifting from inflationary concerns to growth concerns. US Inflation remains sticky, but despite this USTs kept on rallying aggressively. In Europe, fiscal remains a growing risk, with leaders under pressure to increase defense spending to at least 2.5% of GDP, with some advocating for 3%. Post-German elections, potential infrastructure spending could put additional pressure on duration with impacts on growth uncertain.
We think there is a general feeling of complacency with most risk assets priced for perfection. In the current context of tight valuations, high uncertainty, and rising volatility, we continue to remain cautiously positioned. Our net exposure remains low at ~40%. Our yield to call is 6.4%. In credit, spreads remain tight, and we don’t find credit beta attractive. However, certain pockets offer value, and we focus on company-specific situations with tightening potential.
Our current positioning means we are well placed if a risk correction materialises and have space to add risk in our cash book in this instance.
*Note indices are used to illustrate the relevant asset class
More in detail:
Net EM exposure (incl. cash short and single name CDS) represents 12% of the book. EM local is currently 5% of the Fund.
The Fund blended YTC is 6.4%.
The Fund duration is now 2.9y.
We hold 36% protection on tight global CDS indexes and single name CDS.
Net exposure in financials (incl. cash short and single name CDS) represents 32% of the book. The asset class outperformed strongly over the past twelve months.
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 12% of the book. EM local is currently 5% of the Fund.
Financial Credit Strategy
It was a mixed month for risk assets as geopolitical and macroeconomic developments continued to diverge across the world and had different outcomes on markets. As an illustration, equity markets performance in February ranged from -6% in Japan and -3% across US leading indices to +4% in European leading markets. Rates rallied across the curve by 15-20bps in core countries, with a more muted 5-10bps move tighter in European periphery members. At the centre of this is the very different monetary paths that Central Banks in key global markets are likely to take over the coming quarters.
Investor appetite has yet to show any signs of moderating for European financials landscape and February saw a further 14% increase in equity indices, boosting YTD returns to 26%; by contrast, US banks retreated 2%, leaving YTD returns at 6.5%. Across European financial credit, spreads tightened in February by up to 15bps with AT1s firming around 75c. Overall, the sector continues to benefit from a favourable combination of solid fundamental drivers, unique technical factors, and relatively attractive valuation metrics.
European banks closed out their FY24 results reporting season in February and there was very little change in the key themes from those entities that reported earlier in January. Fundamental dynamics remain robust, meaning that core capital build should continue over the coming quarters even if the ECB embarks on an easing path. Importantly, asset quality deterioration was very isolated in a few specific pockets that generically do not apply to most European banks.
The probability of further potential consolidation across the European financial system increased in February. Although Italy remains the most fertile ground for outright M&A with transactions already in play, we note that in the UK activity could pick-up as portfolio trades continue to happen and some banks have excess capital and targets that could likely lead to inorganic growth. Separately, the IPO of a restructured bank in Portugal could attract new entrants to that market given the scarcity of clear-cut opportunities.
Primary activity in February was EUR50bn and posted a very mixed picture across parts of the capital structure. Whereas funding so far this year has been c15% lower than in 2024 due to lower secured refinancings, capital is running c20% higher than last year. It is noteworthy to highlight that February was the most active month for capital trades since at least 2018 with financial entities continuing to refinance in some cases over one year ahead of call dates. As a result, almost 70% of this year’s AT1s up for call have already been dealt with, adding to the positive technical in the asset class as primary supply should dry up into year-end.
Financial Equity Strategy
February 2025 was a noteworthy month for financial stocks as the headline 1.5% return of the MSCI ACWI Financials Index belied meaningful divergence under the surface. European banks continued their strong start to the year, finishing the month up 14%. In the US, by contrast, increasing uncertainty around the potential negative impacts of tariffs and government spending cuts rattled the market with large and small banks down 2% and 3%, respectively. We took advantage of these divergent moves to tactically lock-in some gains on European names while slowly rotating a bit of small amount of capital into US financials.
The fund entered 2025 with European banks as its largest active and absolute bet given underappreciated and resilient profitability, meaningful capital return, and very compelling valuations which set the table for a powerful rerating potential. Alongside well-received earnings reports and forecasts provided in January, a rerating has indeed started to occur. Through February, the group has rallied over 26% year-to-date, outperforming broader global financials and US bank counterparts by roughly 20 percentage points. We have tactically trimmed our exposure into this move to take some profits as this tends not to be a sector that moves in a straight line; however, despite this rally, European banks remain well below historical valuations and provide meaningful upside from a continued rerating combined with significant payout yields. Further, while rate uncertainty will persist, it does appear that the left-tail risk of deep ECB cuts (a major concern many bearish investors had on European banks just a few weeks ago) has been significantly reduced with the ramping up of fiscal stimulus – and the resultant rise in growth expectations – in Germany. Taking ~1% ECB rates off the table eliminates one of the key bearish arguments for the sector and makes it increasingly hard to justify why European banks should continue to trade with such elevated cost of equity. We remain firmly constructive on European banks over the medium-term and they remain the largest absolute and relative bet in the fund.
The economic landscape in the US has become increasingly unclear since the new administration took power in January and began to roll out its policies, often in confusing and haphazard ways. Consumer sentiment has soured, and businesses have become more cautious amid the news of federal job cuts and the prospect of tariffs increasing prices. While certain tailwinds from the election such as deregulation and increased capital return remain firmly in play, the positive outlook for capital markets activity and loan growth largely depends on consumer and corporate confidence being strong. That confidence is wobbling, and President Trump’s policies, in whatever form they ultimately take, may indeed induce a growth scare (or worse). We are very cognizant of the implications of such a scare, as well as the wide range of potential outcomes in the current situation. The euphoria that the election result was met with has unwound completely, with some perceived “Trump deregulation winners” back down to June (ie pre-debate) levels. As we wrote at the time, we were very skeptical of the initial euphoric reaction (and sold into it), but this complete unwinding looks harsh as there will be clear positive tailwinds for certain segments and companies within the US financial space even if growth does slow fairly dramatically, and we are finding some banks and insurers that trade with European bank-esque payout yields of 9-12%. Thus, we have taken a very measured approach of deploying capital into names that we are comfortable owning for the medium/long-term at what should prove to be attractive entry-point valuations.
Global Credit Strategy
How we did in February: The fund returned between 0.9% and 1.6% across different share classes, compared to EUR HY (BAML HE00 Index) 1.0%, US HY (BAML H0A0 Index) 0.7% and EM sovereign credit (BAML EMGB Index) 1.3%. Performance in September, gross of fees in EUR, was: (i) Credit: 1.24%, with 21.27% from cash bonds and -3bps from CDS; (ii) Rates: -5bps; (iii) FX: 1bps, (iv) Equity: 13bps and (v) Other: 0bps.
What we are doing now: February was an eventful month, marked by significant macroeconomic data, elections, and geopolitical headlines. Credit markets performed well, anchored by strong flow creating a ‘structural bid’ for credit. A lack of sellers and tepid issuance in HY continue to push secondary stronger.
However, we believe uncertainty and macro risks are becoming harder to ignore. Mixed macro data and policy uncertainties are weighing on sentiment. Citi’s economic surprise index fell from +40 in November to -16 recently, with consumer sentiment, ISM, PMIs, housing starts, and factory orders missing expectations. Tariff headlines are likely to continue, with markets’ interpretation of said tariffs shifting from inflationary concerns to growth concerns. US Inflation remains sticky, but despite this USTs kept on rallying aggressively. In Europe, fiscal remains a growing risk, with leaders under pressure to increase defense spending to at least 2.5% of GDP, with some advocating for 3%. Post-German elections, potential infrastructure spending could put additional pressure on duration with impacts on growth uncertain.
We think there is a general feeling of complacency with most risk assets priced for perfection. In the current context of tight valuations, high uncertainty, and rising volatility, we continue to remain cautiously positioned. Our net exposure remains low at ~40%. Our yield to call is 6.4%. In credit, spreads remain tight, and we don’t find credit beta attractive. However, certain pockets offer value, and we focus on company-specific situations with tightening potential.
Our current positioning means we are well placed if a risk correction materialises and have space to add risk in our cash book in this instance.
*Note indices are used to illustrate the relevant asset class
More in detail:
We hold 36% protection on tight global CDS indexes and single name CDS.
Financial Credit Strategy
It was a mixed month for risk assets as geopolitical and macroeconomic developments continued to diverge across the world and had different outcomes on markets. As an illustration, equity markets performance in February ranged from -6% in Japan and -3% across US leading indices to +4% in European leading markets. Rates rallied across the curve by 15-20bps in core countries, with a more muted 5-10bps move tighter in European periphery members. At the centre of this is the very different monetary paths that Central Banks in key global markets are likely to take over the coming quarters.
Investor appetite has yet to show any signs of moderating for European financials landscape and February saw a further 14% increase in equity indices, boosting YTD returns to 26%; by contrast, US banks retreated 2%, leaving YTD returns at 6.5%. Across European financial credit, spreads tightened in February by up to 15bps with AT1s firming around 75c. Overall, the sector continues to benefit from a favourable combination of solid fundamental drivers, unique technical factors, and relatively attractive valuation metrics.
European banks closed out their FY24 results reporting season in February and there was very little change in the key themes from those entities that reported earlier in January. Fundamental dynamics remain robust, meaning that core capital build should continue over the coming quarters even if the ECB embarks on an easing path. Importantly, asset quality deterioration was very isolated in a few specific pockets that generically do not apply to most European banks.
The probability of further potential consolidation across the European financial system increased in February. Although Italy remains the most fertile ground for outright M&A with transactions already in play, we note that in the UK activity could pick-up as portfolio trades continue to happen and some banks have excess capital and targets that could likely lead to inorganic growth. Separately, the IPO of a restructured bank in Portugal could attract new entrants to that market given the scarcity of clear-cut opportunities.
Primary activity in February was EUR50bn and posted a very mixed picture across parts of the capital structure. Whereas funding so far this year has been c15% lower than in 2024 due to lower secured refinancings, capital is running c20% higher than last year. It is noteworthy to highlight that February was the most active month for capital trades since at least 2018 with financial entities continuing to refinance in some cases over one year ahead of call dates. As a result, almost 70% of this year’s AT1s up for call have already been dealt with, adding to the positive technical in the asset class as primary supply should dry up into year-end.
Financial Equity Strategy
February 2025 was a noteworthy month for financial stocks as the headline 1.5% return of the MSCI ACWI Financials Index belied meaningful divergence under the surface. European banks continued their strong start to the year, finishing the month up 14%. In the US, by contrast, increasing uncertainty around the potential negative impacts of tariffs and government spending cuts rattled the market with large and small banks down 2% and 3%, respectively. We took advantage of these divergent moves to tactically lock-in some gains on European names while slowly rotating a
bit ofsmall amount of capital into US financials.The fund entered 2025 with European banks as its largest active and absolute bet given underappreciated and resilient profitability, meaningful capital return, and very compelling valuations which set the table for a powerful rerating potential. Alongside well-received earnings reports and forecasts provided in January, a rerating has indeed started to occur. Through February, the group has rallied over 26% year-to-date, outperforming broader global financials and US bank counterparts by roughly 20 percentage points. We have tactically trimmed our exposure into this move to take some profits as this tends not to be a sector that moves in a straight line; however, despite this rally, European banks remain well below historical valuations and provide meaningful upside from a continued rerating combined with significant payout yields. Further, while rate uncertainty will persist, it does appear that the left-tail risk of deep ECB cuts (a major concern many bearish investors had on European banks just a few weeks ago) has been significantly reduced with the ramping up of fiscal stimulus – and the resultant rise in growth expectations – in Germany. Taking ~1% ECB rates off the table eliminates one of the key bearish arguments for the sector and makes it increasingly hard to justify why European banks should continue to trade with such elevated cost of equity. We remain firmly constructive on European banks over the medium-term and they remain the largest absolute and relative bet in the fund.
The economic landscape in the US has become increasingly unclear since the new administration took power in January and began to roll out its policies, often in confusing and haphazard ways. Consumer sentiment has soured, and businesses have become more cautious amid the news of federal job cuts and the prospect of tariffs increasing prices. While certain tailwinds from the election such as deregulation and increased capital return remain firmly in play, the positive outlook for capital markets activity and loan growth largely depends on consumer and corporate confidence being strong. That confidence is wobbling, and President Trump’s policies, in whatever form they ultimately take, may indeed induce a growth scare (or worse). We are very cognizant of the implications of such a scare, as well as the wide range of potential outcomes in the current situation. The euphoria that the election result was met with has unwound completely, with some perceived “Trump deregulation winners” back down to June (ie pre-debate) levels. As we wrote at the time, we were very skeptical of the initial euphoric reaction (and sold into it), but this complete unwinding looks harsh as there will be clear positive tailwinds for certain segments and companies within the US financial space even if growth does slow fairly dramatically, and we are finding some banks and insurers that trade with European bank-esque payout yields of 9-12%. Thus, we have taken a very measured approach of deploying capital into names that we are comfortable owning for the medium/long-term at what should prove to be attractive entry-point valuations.
Sustainable Equity Strategy