UK & EU – For professional and institutional investors only
Switzerland – this is an advertising document for professional and institutional clients as defined by the Swiss Financial Services Act only
What a difference a month makes.
After January’s optimism, investors were forced to take stock as the positive data points continued, but this time accompanied by a reacceleration of core inflation numbers. This led to a reassessment as to where the terminal rate lies and how long rates are likely to be elevated in the Fed’s continued fight against inflation.
In terms of the three scenarios for the year:
1.The Federal Reserve have tightened the perfect amount and orchestrated a soft landing
2.They have tightened too much already and a hard landing lies ahead
3.They have not tightened enough and rates will be ‘higher for longer’
Having more or less priced in 1, the market was forced to recalibrate and apply a higher probability to scenario 3. Investors have thus far this year seemed content to follow the data in ascribing very little probability to scenario 2, they have been less willing to use that same data to meaningfully increase the probability of scenario 3.
The Fund increased by 1.2% during the month.
After the collapse in rates volatility at the start of the year, with higher prices came higher volatility, to the benefit of the Fund’s long rates volatility strategies.
Elsewhere, the majority of the Fund’s other exposures also provided for some positive return. The notable outlier was the Gold Intraday strategy, which is net long gold and suffered as rates made their way back up.
Two new positions have been added to the protection portfolio in the form of two put spreads on the S&P 500, taking advantage of the low volatility seen after the years initial rally.
The buoyancy of January turned out to be short lived as inflation’s downward trajectory paused, and in core numbers even reversed slightly. February brought back memories of 2022 as both equities and bonds sold off simultaneously. It is in these conditions that bonds will continue to fail to fulfil their role as a diversifier in portfolios. The market still misprices the likelihood of inflation proving more stubborn and central bank’s hands being tied with regards to policy.
For the first time in many years central banks have replenished their policy quiver with the arrows of rate cuts when necessary. However, the idea that they would use those arrows before either it is completely necessary or the battle against inflation has been truly won is fanciful. Never before have the Fed managed to orchestrate a soft landing; this could be the first time, but history tells us that they tend to raise rates until something breaks in the economy. Here is to hoping that this time is different; it rarely is. In the meantime, the portfolio is well positioned to provide true diversification and has during its life tended to prefer periods of heightened stress for traditional asset classes
|Hong Kong 50||0.0%||-9.4%|
|US Equity Income||3.4%||-2.5%|
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