The reflation trade took a pause over the month of April
G10-focused discretionary Global Macro managers were impacted by the pause in the reflation theme. Yield curve steepeners in the US, UK and Europe as well as shorts in the 10-year part of the curve detracted from performance. In equities, gains from long exposure to Europe and the UK were offset by longs in Japan and financials indices. In April, FX saw a reversal of Q1’s trends, with the US dollar generally weakening against most counterparts. FX trading produced mixed returns: long USD/ JPY and long GBP/EUR generally posted a negative contribution while long commodity currencies (CAD, AUD and NOK) and selected EM currencies were positive. In commodities, a thematic long exposure to copper, driven by an optimistic view on the global economic recovery and demand for electric vehicles, produced significant gains. Following a challenging first quarter of the year, emerging-market-focused managers rebounded somewhat in April. Local rates positions and selected sovereign credits were the largest sources of P&L. Most Systematic managers ended the month in positive territory as they continued to profit from equity market exposure. The rally in commodities, especially in agricultural markets, added to the overall performance as well. Fixed income modestly detracted from returns.
Equity Hedge managers beneffited from the market rotation
Equity markets were very strong in April and enjoyed a particularly impressive start to the month. The US was the best region, followed by Europe and Asia ex-Japan, which was slightly down. Globally, many of the sectors that had previously been laggards on a YTD basis bounced back. These included technology and consumer discretionary, which is in line with the trend of growth outperforming value. Q1’s reversal in favour of more cyclical names and smaller caps, mainly in energy and industrials, started to fade in April. Nevertheless, cyclicals continue to lead markets this year. Inflation and commodity prices remain the areas to be monitored, as their impacts on growth companies’ profitability and on earnings in general could be significant. In this environment, Equity Hedge managers did well during the month as their books generally benefited from this market rotation. Net exposures shifted into Europe at the expense of North America, while Asia-focused managers re-increased their gross exposures back to elevated levels.
A very good month for High Yield investors
In April, Event Driven Credit and Equity managers posted strong performance. High-yield bond yields declined to a record low in April and spreads to a multi-year low as the economic recovery accelerated. Meanwhile, quarterly earnings exceeded expectations and Treasury yields eased from a one-year high. With the decline in rates, April provided the best return in 2021 for high-yield investors. Leveraged loans rallied in April amid an improved tone for risk assets, ongoing retail inflows and new CLO origination, which is tracking at record levels. Merger arbitrage specialists benefited from spreads tightening during April. New deal-flow activity remained robust. Apart from the competing bid for Kansas City Southern (a $29 billion railway deal), with Canadian National coming in with a bid of 21% over the implied value, there was also the £17.4bn Thermo Fisher acquisition of PPD, both being good examples of the renewed flow the M&A space has been witnessing in recent months. Special situations and Activist Equity managers benefited from the tailwind of a positive equity market backdrop.
Low volatility hits Relative Value managers
Relative Value performance was broadly muted as volatility fell across the board. After an aggressive move higher in Q1, rates stabilised in April and found a range. Trading opportunities were scarce and fixed income arbitrage managers struggled as a result. Volatility arbitrage had a tough month as realised volatility remained at an extremely low level and implied volatility dropped further. Dispersion strategy was particularly hard hit. In contrast, index volatility was bid up by institutional investors keen to protect their equity books. Meanwhile, single-stock volatility dropped under the pressure of relentless issuance of structured products. The same phenomenon affected convertible strategy. Gamma trading opportunities dried up as single-stock volatility stayed low, while at the same time the drop in implied volatility caused hedged convertible positions to incur losses. After a difficult month, the SPAC market showed more stability, thereby allowing managers to make up some of their losses in March from a mix of announced deals and active trading in the secondary market.
HF Flash Report
This document is not intended for persons who are citizens of, domiciled or resident in, or entities registered in a country or a jurisdiction in which its distribution, publication, provision or use would violate current laws and regulations. In particular, investment funds or any other collective placement instruments which have not been authorised for public offering in the investor’s country of domicile may only be offered as private placements to qualified investors. Additional investment restrictions may be provided for in the official offering documentation (available upon request). The information and data furnished in this document are disclosed for information purposes only; the Pictet Group is not liable for them nor do they constitute an offer, an invitation to buy, sell or subscribe to securities or other financial instruments. Furthermore, the information, opinions and estimates in this document reflect an evaluation as of the date of initial publication and may be changed without notice. Information and opinions presented in this document have been obtained from sources believed to be reliable, and, although all reasonable care has been taken, the Pictet Group is not able to make any representation as to its accuracy or completeness. The value and income of the securities or financial instruments mentioned in this document are based on rates from the customary sources of financial information and may fluctuate. The market value may vary on the basis of economic, financial or political changes, the remaining term, market conditions, the volatility and solvency of the issuer or the benchmark issuer. Moreover, exchange rates may have a positive or negative effect on the value, the price or the income of the securities or the related investments mentioned in this document. Past performance must not be considered an indicator or guarantee of future performance, and the addressees of this document are fully responsible for any investments they make. No express or implied warranty is iven as to future performance. Investors shall conduct their own analysis of the risks (including any legal, regulatory, tax or other consequence) associated with an investment and should seek independent professional advice. The content of this document is confidential and can only be read and/or used by its addressee. The Pictet Group is not liable for the use, transmission or exploitation of the content of this document. Therefore, any form of reproduction, copying, disclosure, modification and/or publication of the content is under the sole liability of the addressee of this document, and no liability whatsoever will be incurred by the Pictet Group. The addressee of this document agrees to comply with the applicable laws and regulations in the jurisdictions where they use the information reproduced in this document. This document is issued by the Pictet Group. This publication and its content may be cited provided that the source is indicated. All rights reserved. Copyright 2020.