Economy & Capital Markets:
During the period yields on the 10 year US Treasury increased to 1.76% from 0.67% a year ago, but 1 year bill yields fell to 0.07% from 0.15%, whilst the US Federal Reserve projected inflation for 2021 of 2.4% falling back to 2% next year. With negative real yields across the curve, capital markets remained relaxed about the emergence of inflation, allowing an interpretation of the steepening of the curve, as a better risk/reward environment. However the suspension of commercial bank emergency reserve exemption measures did see ripples in equity markets. With low coupons, government borrowings have ballooned out to levels that remain difficult for future generations to return the principal through taxation, contrasting with the post-WWII beneficial demographics. Increased US long yields contributed to a recovery in the US dollar and pressured gold.
Whilst proposals to lift the US corporate tax rate to 28% from 21% do little to encourage entrepreneurialism, they do indicate a level of fiscal responsibility missing from the last 20 years as the present administration fulfill campaign infrastructure promises.
Indication of over 300% total debt to GDP in China give the PBOC little opportunity to raise interest rates that would severely reduce profits of the highly leveraged property sector. However domestic demographic and technology impact on inflation continue to depress that need.
In the first quarter the dollar portfolio returned 6.2% with a 1.5 Sharp, whilst the S&P500 returned 5.8% and the ACWI 4.9%. At the end of the period the portfolio held 27% cash and, had a 41% net long position in basic materials, 18% in consumer cyclicals and 15% in financials. Best positions were Nippon Yusen KK (Japanese shipping) contributing 2.6% to total performance, Short JPY 1.8%, Danieli & Co (Italian metals) 1.5%, Tronox Holdings (US titanium) 0.9% and Komatsu (Japan construction machinery) 0.9%.
The firm maintained it’s Californian financial licence allowing it’s global client base to be protected under Californian (USA) laws and regulations.