The H Fund (USD) gained 1.41% in March bringing the YTD return to 2.88% and the rolling annual return to -4.80%.
By the end of April, the MSCI World index of equity market performance had just crept into positive territory for the year. Yet the comparison between these two data points fails to capture the nature of the journey between them. Markets stared into the abyss in mid March, so relief at not toppling in has been received as the dawning of a bright new era. Yet the buying of stocks has not exactly been discriminating. Bloomberg identified 130 companies in the S&P and Euro Stoxx 600 indices with debt to equity ratios of over 50% and negative returns on assets for 2008. On average, their shares rose by 82% between March 9th and mid April, a period in which the MSCI rose by just under 30%.
Macroeconomic indicators show a declining rate of descent. In addition, markets function better than they did a few months ago; capital can be raised and liquidity is returning, especially in those markets that froze in Q4 2008, credit and interbank. This improves asset valuations by reducing the liquidity premium, and the Banks liberation from mark to market accounting disciplines slows selling. The politicians have succeeded in creating a virtuous circle of rising asset values, risk appetites and capacity for risk taking even if the lion’s share of the risk is being taken by the taxpayer.
All but one of our themes made money in April. The gains generated by the Credit Spreads in Transition theme came from the long credit bias currently maintained by the managers we support, the first time we could have made such a statement for four years. Low priced corporate bonds began to receive attention in April, value is emerging in certain elements of the US Mortgage universe and US Government programmes are seen as providing a backstop.
Asian Consumer Power was a significant contributor. This validates our belief that the managers in the theme would capture the benefit of returning risk appetites, but it also reflects the fact that the news background is supportive. Taiwan has granted local stock market access to mainland Chinese investors and China Mobile has made an immediate investment. No longer is the possibility of a GDP slowdown in China hanging over regional equity valuations, in fact there is talk of official restraint on certain types of bank lending.
Global Financial Sector Dislocation detracted from performance as financial stocks rose sharply. A number of Bank’s first quarter results exceeded expectations. Behind the headline numbers, asset disposals and ‘one offs’ make up an important proportion of ‘revenues’. Banks are selling stakes in foreign Banks, especially in China, acquired in more optimistic times, and subsidiaries that they can do without. The immediate objective is to fend off official pressure to raise more equity. In the medium term it is to rake in the fat spreads available on traditional business, bolstering capital from earnings. The sector view is less clear cut than it was just a few weeks ago, but our managers still envisage future write-downs haunting weak banks.