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Insight - Making Sense of the Narrative

Invest with Market Thinking in a UCITS global equity fund, developed in collaboration with Toscafund, a UK and HK-based specialist investment manager, harnessing the power of behavioural finance through thematics and factor ETFs.

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Passive and Semi Passive managers are only controlling for benchmark and volatility risk. To the extent that active managers are also controlling for the risk of loss of capital they will generally take less risk and thus generate lower returns - by design. Thus the argument that active can’t beat passive is mis-specified. The closer we move to the underlying investor the more important it is to control for risk of loss of capital rather than risk of loss of job and thus the more value can be added by active managers.

Markets are range trading, with traders reducing exposure ahead of a likely volatile summer. Currency markets in particular are looking for catalysts for directional moves to come from politics, with Europe, the UK and the US all having Elections in the coming months. The biggest tail risk we see is from a New White House revisiting the Plaza accord or 1985 and actively talking down the Dollar. Interestingly, while the currency traders are not about talking this at the moment, some of the obvious tail risk hedges - diversification away from $ assets, EM, Gold, Commodities - are already starting to perform.

The timing of US tariffs on Chinese EVs and Solar panels is political, but they also signal a significant shift in the Global Economy as Globalisation rapidly unravels. The reality is that China's competitive advantage is actually in automation, network effects, an integrated supply chain and a huge home market, which means that pretending it is about cheap labour and subsidies achieves nothing other than punishing consumers. Europe in particular can't compete with China because its energy costs are too high thanks to US led tariffs on Russia and the madness of net zero policies and US pressure to match these new tariffs threatens to seriously unbalance the unity of the EU - already troubled by populist push back against the key Globalist policies of open borders and net zero. Perhaps most important though is that a US economy that has successfully cut its import dependency is one that has every incentive to talk down the $

This time last year we were honoured to be invited to 'pitch' at the Sohn Conference in Hong Kong. Team Tosca's pick, Italian Bank BPER, came in a solid second with a return of over 100%, making the case for the bank, but also the wider thematic of European Financials being winners under the new New Normal. We had the added 'benefit' that the whole sector was oversold on a macro/emotional basis in the wake of the Silicon valley Bank debacle last March and while that has now unwound, the positive stance on the sector remains intact.

After a powerful run from q4 2023, equities paused in April, with many of the momentum stocks simply running out of, well, momentum and leading many to revisit the old adage of 'Sell in May'. Meanwhile, sentiment in the bond markets soured further as the prospect of rate cuts receded - although we remain of the view that the main purpose of rate cuts now is to ensure the stability of bond markets themselves. The best performance once again came from China and Hong Kong as these markets start a (long delayed) catch up as distressed sellers are cleared from the markets. Markets are generally trying to establish some trading ranges for the summer months and while foreign policy is increasingly bellicose as led by politicians facing re-election as well as the defence and energy sector lobbyists, western trade lobbyists are also hard at work, erecting tariff barriers and trying to co-opt third parties to do the same. While this is not good for their own consumers, it is also fighting the reality of high quality, much cheaper, products coming from Asian competitors, most of whom are not also facing high energy costs. Nor is a strong dollar helping. As such, many of the big global companies are facing serious competition in third party markets and investors, also looking to diversify portfolios, are starting to look at their overseas competitors.

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