Article08 Oct 2024

Rate cuts boost markets - September Trust Update

Nick Brind

Fund Manager

George Barrow

Fund Manager

Tom Dorner

Fund Manager

Market review

Equity markets made further gains in September on the back of the Federal Reserve cutting interest rates by a larger than expected 50bps coupled with stronger US economic data and the actions of Chinese policymakers to stimulate the Chinese economy.

Against this background, financials lagged wider equity markets and, due to sterling strength, the Trust’s NAV fell 1.4% against the benchmark index, the MSCI All Country World Financials Index, which fell 0.5%. An underweight position in China and Hong Kong were the key drivers of underperformance during the month but weaker earnings guidance from JP Morgan was also a headwind.

China

The Chinese equity market rallied an incredible 25% in the last six days of September following the announcement by PBoC governor Pan Gongsheng of stimulus measures which included cutting the central bank’s main policy rate by 20bps, reserve requirements by 50bps, mortgage rates by 50bps and reducing the down payment for second-home purchases from 25% to 15%. This was coupled with steps to support the equity market via a swap facility for brokers and funds to buy stocks as well as a refinancing facility through which companies can borrow to do share buybacks. Investor sentiment received a further boost two days after the stimulus announcement when China's leaders pledged to intensify fiscal support which many see as the missing ingredient to a sustained rally.

We have long been underweight China, due to a mixture of few companies that meet our hurdle rates and concern around the geopolitical overhang, regulatory intervention and weak outlook for growth. While we think these measures are unlikely to quickly resolve issues in the Chinese property and debt markets, given a combination of low valuations and very underweight positioning among global investors, we purchased a position in AIA Group which is a stock we have owned before and has a great long-term track record of growth in China, Hong Kong and south-east Asia that is underpinned by its excellent agent distribution network. Nevertheless, we remain underweight China.

European bank M&A

UniCredit’s acquisition of a large holding in Commerzbank* during the month is significant news. Initially announcing an equity stake of 9%, with 4.5% acquired through an accelerated book building offer by the German state, by the end of the month UniCredit had entered into several derivative contracts to secure the acquisition of a further 11.5% stake, pending approval from the ECB to increase its stake up to 29.9%. While the prospect of consolidation has been a theme of 2024, as highlighted by BBVA’s approach for Banco de Sabadell*, this would mark the first cross-border M&A in European banking for over a decade.

We view the move as positive and believe either UniCredit will be able to execute a value-creating deal or quickly move on due to its holding being mainly via derivatives.

For context, UniCredit, which is one of the Trust’s largest holdings, is the second largest bank in Italy, with total assets of €800bn and a sizeable retail and commercial banking presence across Italy, Germany, through its ownership of HypoVereinsbank (HVB), Austria and several central and eastern European countries. Although one of Germany’s largest commercial banks, Commerzbank is the smaller peer, with total assets of €560bn and a more reduced international footprint and a noticeable presence only in Poland through its subsidiary mBank. We view the move as positive and believe either UniCredit will be able to execute a value-creating deal or quickly move on due to its holding being mainly via derivatives.

US economy

The fact that the Federal Reserve was leaning towards cutting interest rates by 50bps versus the previously expected 25bps was trailed in the Wall Street Journal, among others, before the decision was made in the conference call afterwards. Fed Chair Jerome Powell backed it by arguing that the fall in inflation had given the central bank space to make a bigger cut as an insurance policy. In contrast, the latest economic data has shown the jobs market has picked up with positive revisions to employment numbers in July and August as well as a much stronger print for September coupled with an increase in job openings.

However, employment data is notoriously inaccurate and large negative revisions have been overlooked by equity markets, but other leading indicators suggest the probability that the US is heading for a soft landing has increased. It is too early to tell whether that proves to be the case but, either way, outside segments such as office commercial real estate, some areas of credit card lending and automotive loans there is very limited sign of stress in loan books. Household and corporate balance sheets remain strong so absent an exogenous shock we believe the financial sector is well positioned to weather a slowdown extremely well, but undemanding valuations suggest the sector should perform strongly if a soft landing does come to pass.

Investment activity

Against this background, we have at the margin reduced our exposure to European banks as lower interest rate expectations on the back of weaker economic data suggest some headwinds to earnings estimates. Conversely, we have taken a number of new positions in, among others, Globe Life, a US life insurance company, Tryg, a Danish insurance company and Bank Rakyat Indonesia, an Indonesian bank with a focus on lending to small businesses. We bought the first two after a period of underperformance but they still have long-term compounded shareholder value. We see Indonesia as an indirect beneficiary of the Chinese stimulus, but ower interest rates should also help improve margins and therefore profitability.

*not held

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Nick Brind
Nick joined Polar Capital following the acquisition of HIM Capital in September 2010, and is co-manager of Polar Capital Global Financial Trust and lead manager of the Polar Capital Financial Credit Fund. He has investment experience across a wide range of asset classes but since 2003 has focused on global financials.
Before joining HIM Capital, Nick worked at New Star Asset Management. While there, he managed the New Star Financial Opportunities Fund, a high-income financials fund investing in the equity and fixed-income securities of European financials companies. Previous to that, he worked at Exeter Asset Management and Capel-Cure Myers.
George Barrow
George joined Polar Capital in September 2010 as an analyst on the Financials Team. He is a co-manager on the Polar Capital Financial Opportunities Fund, and the Polar Capital Global Financials Trust, with Nick Brind and Tom Dorner.
He has over 10 years’ experience analysing Europe, Asia and emerging markets. Prior to joining Polar Capital, he was an analyst at HIM Capital from 2008 where he completed his IMC.
Tom Dorner
Tom joined Polar Capital as a Fund Manager in the Financials team in December 2023. He is a co-manager on the Polar Capital Global Financials Trust, with Nick Brind and George Barrow.
He joined from abrdn where he was a Senior Investment Director in the Developed Markets team and managed the abrdn Europe ex UK Income Equity Fund. He was responsible for analytical coverage of European financials and managed a number of other European investment funds during his nine years there. Prior to this, he was an analyst specialising in the European Insurance sector at Citi and Lehman Brothers in London.