Monthly Review – June 2023
OUR PERSPECTIVE
As we come to the mid-year junction it would appear that a recession in the UK is all but set in stone. Inflation has proven to be more persistent than anticipated, leading the Bank of England to continue raising interest rates. While this “higher for longer” approach may have initially benefited the pound through repriced interest rate differentials, tightening credit and increasing the cost of capital will ultimately slow economic growth and put renewed pressure on the currency. A weaker pound will further exacerbate inflation risks, potentially resulting in a deeper and more prolonged recession.
Interest rates everywhere have risen at a historically unprecedented rate, and corporate debt in the developed world is at historically unprecedented levels. In recent years corporates have been able to refinance at unjustifiably low levels. However, the refinancing cycle is probably over for now!
As we write this month’s commentary, we ask ourselves what this means to credit markets globally. We certainly do not believe the bankruptcy of Thames Water is an isolated case, the question is whether it will be anything as bad as 2008 / 09?
Focusing on the UK, we anticipate a continued contraction in consumer sentiment and demand in the coming months. However, a collapse in demand will also drive down inflation; and considering the strength of the labour market, it could be argued that the recovery might arrive sooner than expected. It is important to remember that whilst situations are often not as promising as hoped, they’re rarely as dire as they may seem.
Chart 1: US Bankruptcy filings rising at an extraordinary rate in recent weeks:
Source: Apolloacadamy.com, Bloomberg, Apollo Chief Economist. Note: Filings are for companies more than $50m in liabilities. For week ending June 21, 2023.
EQUITIES
Sentiment continued to improve, and the US equity rally broadened out as small and midcap companies outperformed their large cap peers. At the end of May, US small and midcaps were still in negative territory for the year, and now they are up 7% to 8%. The rally comes as the Fed took a pause in their hiking cycle in early June. The Fed hinted they will continue raising rates again later in the year. Whilst we didn’t participate in the June rally to the extent we would’ve liked to, we’re happy being UW equities given where we are in the macroeconomic cycle and what valuations seem to infer.
FIXED INCOME
A pause in the Fed’s hiking cycle had little impact on fixed income markets as the treasury market were relatively sanguine and credit marginally outperformed. In the UK inflation surprised to the upside and the Bank of England were forced to hike a further 50 basis points and the ECB followed suit. We retain a significant bias towards treasury markets with some short-term inflation-linked exposure. We retain however a significant UW towards credit markets given fears surrounding liquidity and credit risk.
REAL ASSETS
More rumours spread surrounding the impending collapse of the commercial real estate market. We note that things are rarely as bad as bear-pundits forecast, but certainly the extent and pace of the hiking cycle and tightening of lending standards will not be without consequences and we definitely share some of the concerns. We remain underweight property given prices do not reflect the significant re-pricing of interest rates and of weakening demand. We retain conviction in the infrastructure space, especially in the renewable and digital infrastructure.
Within the commodity complex, whilst positive on the longer-term trends, the near term the risk of an economic downturn could put further pressure on already weak prices, and we remain underweight. We retain however a significant overweight position in gold.
SPECIALIST STRATEGIES
Specialist strategies continue to play a significant stabilising role within our portfolios. Our managed futures & trend following exposures continue to see a recovery and has had a strong Q2 following a difficult Q1. Our market neutral exposures continue to deliver solid results. We retain limited exposure to private markets and retain concerns regarding NAV and risks of mark downs.
CURRENCIES
Generally, we remain neutral on currencies. On the margin we note that whilst inflation and interest rate differential would support a stronger USD, the risks of devaluation and trust in the US political systems remain longer-term concerns. We retain our positive view on the Japanese Yen, which we believe is both undervalued and under-owned, with potential catalysts for a revaluation higher.
CONTACT US
For further information on any of our services, or if you would like to arrange a meeting with an investment manager to see how we can work with you, please get in touch.
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Important information
Shard Capital Partners LLP is a limited liability partnership, registered in England with registration number OC360394. Shard Capital Partners LLP Registered office: Floor 3, 36-38 Cornhill, London, EC3V 3NG. Shard Capital Partners LLP is authorised and regulated by the Financial Conduct Authority in the United Kingdom, reference number 538762.
This document is provided for information purposes only and is intend for confidential and sole use by the recipient. It is not to be reproduced, copied or made available to others. The information set out in this document does not constitute investment advice or a personal recommendation. The views expressed in this document are not intended as an offer or a solicitation, to purchase or sell any security or other financial instrument, credit or lending product or to engage in any investment activity.
Past performance is not a guide to future performance. It is important that you understand that with investments, your capital is at risk. The value of investments, as well as the income derived from them, can go down as well as up and investors may get back less than the original amount invested. It is your responsibility to ensure that you make an informed decision about whether to invest with us, based on your particular objectives. If you are still unsure if investing is right for you, please seek independent advice.
The information and opinions expressed within this document are the views of (the company) and are based on information we believe to be reliable, but we do not represent that they are accurate or complete, and they should not be relied upon as such. Any information provided is given in good faith but is subject to change without notice.
No liability is accepted whatsoever by (the company) or its employees and associated companies for any direct or consequential loss arising from this document.
Disclaimer:
This document is provided for information purposes only and is intend for confidential and sole use by the recipient. It is not to be reproduced, copied or made available to others. The information set out in this document does not constitute investment advice or a personal recommendation. The views expressed in this document are not intended as an offer or a solicitation, to purchase or sell any security or other financial instrument, credit or lending product or to engage in any investment activity.
Past performance is not a guide to future performance. It is important that you understand that with investments, your capital is at risk. The value of investments, as well as the income derived from them, can go down as well as up and investors may get back less than the original amount invested. It is your responsibility to ensure that you make an informed decision about whether to invest with us, based on your particular objectives. If you are still unsure if investing is right for you, please seek independent advice.
The information and opinions expressed within this document are the views of (the company) and are based on information we believe to be reliable, but we do not represent that they are accurate or complete, and they should not be relied upon as such. Any information provided is given in good faith but is subject to change without notice.
No liability is accepted whatsoever by (the company) or its employees and associated companies for any direct or consequential loss arising from this document.
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