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Insight - Making Sense of the Narrative


This week, the BoJ finally moved on yield curve control. While the details are not exactly clear, in the manner of FX management in the past, the direction of travel is and the last man standing is now normalising rates. While it will be slow, more in the manner of Powell pre rather than post Covid, unwinding the policies of his predecessors will be a delicate task for BoJ Governor Yueda. As Japan is a major provider of global risk capital and liquidity we need to hope that he succeeds without too much disruption.

We were honoured to be invited to speak at the Sohn event in Hong Kong back in May, where I addressed the topic of investing in the new New Normal as part of our short presentation (video featured) of our 'stock pick' for the conference. We chose one of the themes in our new fund (European Banks) and from that one of the favoured stocks from our colleagues at ToscaFund in the UK where they have run a very successful long short financials fund for over 20 years. Two months in an we are pleased to say that our pick is currently third in the 'competition'. Not that we are competitive.....

We remain unconvinced that Central Banks are raising rates in recognition that their previous policy of zero interest rates not only failed but backfired spectacularly. Indeed, we sense that they are simply chasing reported inflation rates higher risking equal and opposite damage and disruption t omarkets and economies. With the latest inflation numbers coming in weaker, expectations of aggressive tightening are thankfully weakening. For countries with highly rate sensitive household sectors as short term fixed rate mortgages roll off, this would be a major blessing.

As we move further to the new New Normal, investors need to embrace the concept of DEI, not Diversity, Equity and Inclusion, but Diversification, Equities and Income. The good news is that Asset classes are going back to their proper purpose, fixed income (and high yield equity) for income and Equity to offer growth and real returns in an era where inflation will be in the 2-4% rather than the 0-2% range. Cash will trend to a zero real rather than a zero nominal rate and regain its role as a risk management tool.

As we get to half year we see narratives shifting - the negativity on equities is fading after a strong recovery which is feeding into more positive views on economics, although this is only consistent with the new New Normal view that we had in January. The narrow breadth of the rally however has led to AI as a new narrative that we feel is over-done. Equally, while geo-politics has died down as an issue, the Geo-political related weakness in China equities is being 'explained' by an economic narrative that also doesn't really add up. Bonds meanwhile are caught between long term buyers looking to lock in a real return in a 2-4% inflation world and traders who have flipped from Pivot to tighten and who are focusing once again on high frequency data. Q3 is generally lower volume, but potentially higher volatility