Multi-Asset Credit Strategy Monthly Comment - March 2024

March was a positive month for credit markets as Investors continued to assess when the first interest rate cut from the major central banks could be expected, with inflation and labour data remaining important metrics. During the month the Federal Reserve held rates as expected, upgraded their projections to reflect higher growth and inflation, and fewer rate cuts. Growth in 2024 was revised from 1.4% to 2.1%, while core PCE was lifted from 2.4% to 2.6%. The Dot-Plot kept 3 cuts in 2024 but erased 1 cut each for 2025 and 2026. In Europe, ECB has already indicated that June is likely to be the month for the first cut. The economic growth is stagnant, and ECB's medium term inflation projections have just dipped below 2%, which should put it already in the rate cutting territory. Lagarde indicated they would have a lot more inflation data by June, which should give them enough confidence to cut rates.

During the month the strategy posted a positive performance with all asset classes posting positive performances with financials outperforming significantly the rest of the market. The portfolio continues to be cautiously positioned as we maintain a portion of our P&L hedged to mitigate against potential volatility. We have continued to improve the quality of the book taking profits from cyclical corporates and Tier 1 Financials while adding to defensive BB and BBB issuers. As a consequence, the average rating of the portfolio has increased to BBB-. The portfolio managers increased levels of liquidity allowing flexibility in case of a spike of volatility.

Despite the strong start of 2024, we start out with a constructive view for the rest of the year. We expect only a shallow recession in the UK and Europe, rate cuts and lower rates volatility, fundamentals to remain a point of strength coupled with elevated yields giving a far better break-even point to absorb spread volatility. Albeit we see scope for further spread tightening over the course of the year, we expect much of the return to come from carry. We expressed this view mostly via selected defensive BB and BBB rated credits and Tier 2 financials. We continue to think that BBB CLO tranches, yielding 8%, are an extremely attractive opportunity in the current market context.

*Rating Provider: S&P, Moody's and Fitch. Date of rating as of end of the month.

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