Quarterly Review - Seite 2

 

The America First Policy Directive of the Trump administration also saw the suspension of all military US aid to Ukraine whilst numerous negative soundbites cast doubt on the US’s willingness to defend its NATO allies. This prompted a drastic reprioritisation of defence spending in Europe with direct implications for greater government borrowing by EU bloc members. Germany announced a historic fiscal package and debt brake change which will allow for higher defence and infrastructure spending and is expected to stimulate economic growth and address the country's contracting economy. 10-year bund and gilt yields both reached their highest levels in over a year, with the former experiencing its sharpest one day sell-off since German reunification in 1990. The most notable event of the quarter in the UK was Chancellor Rachel Reeves’ Spring Statement. In contrast to the Autumn budget, it was largely positively received by markets, containing substantial spending cuts.

 

Manager Commentary

In the first quarter of the year the Company delivered a NAV total return of +1.36% compared to the +2.13% returned by the benchmark. Underperformance was driven by a softening in credit which saw spreads widen over the period, as markets digested tariff implications and expectations for weakening growth resulting from a global trade war. Despite this, the portfolio performed approximately in line with the ICE BofA 1-3 Year BBB Sterling Corporate Index (+1.54%), whilst outperforming both the BofA Sterling Corporate and Collateralised Index (+0.54%) and the ICE BofA European Currency Non-Financial High Yield 2% Constrained Index (+0.69%).

 

After a positive start to the year, credit spreads moved consistently wider from February onwards as risk-off sentiment took hold. However, such widening should be viewed in the context of longer-term historical levels, with credit spreads only retracing the grind tighter we saw in late 2024, having reached post-GFC tights in January of this year. We have started to see more daily volatility, with the tariff headlines creating notable uncertainty and the credit markets generally feeling nervous despite remaining orderly. However, the lack of more severe price action during the quarter suggests market participants are still presuming that through negotiations the worst of the tariffs can be avoided and indeed we are far from episodic levels despite the steady bleed wider in credit spreads.