Chart of the Month: April 2025 Inflation & Yield Curve Risks

Chart of the Month:
Inflation and the Yield Curve This Chart of the Month examines whether inflation is truly transitory and what the recent steepening of the US yield curve signals for markets.

April 2025 Inflation & Yield Curve – Chart of the Month

 

Is the inflation transitory this time?

At the press conference after the last FED meeting on Wednesday 19th of March, FED chairman Jerome Powell, used the infamous T word to describe the impact that tariff would have on inflation in the short term. While he could well be right, the use of the term “transitory” for describing inflation was very bold as it revives fresh memories of what is probably the worst monetary policy mistake of this decade.

The FED preferred measure for inflation, the core PCE price index (the dark blue line in the chart) was at 2.8% in February on a year over year basis. This level is not alarming in itself. What is more concerning however is that the inflation has not made further progress since May last year (as reflected by the dark blue arrow on the chart) while still being above the 2% FED target.

As the US growth is showing some signs of weakness and the FED made it clear that they view the recent elevated inflation numbers as only a short-term impact from tariffs, the bond market is pricing 3 FED cuts for the year, which would take the FED fund rate at 3.75% in December.

What does it mean for future inflation and the yield curve? Since the start of the year, the inflation expectations one year from now (the light blue line in the chart) has rebounded from 5% to 6.2% as consumers are getting worried of price hikes. Since inflations expectations tend to be self-fulfilling prophecies, this could trigger an upshot in the core PCE price index.

The yield curve can be approximated by the difference between the 10-year nominal yield and the 2-year nominal yield (the dark grey line in the chart). This measure has gone from -36 bps to +32 bps since last May when disinflation progresses stalled (as shown by the dark grey arrow). And as one of the major drivers for its slope is the inflation uncertainty, we could be witnessing the start of a bear steepening, where the 10-year nominal yield rises faster than the 2-year yield.

This is very important because we have seen previously that a steepening yield curve tend to lead to credit spreads widening (which started this year) and ultimately recessions. While we are not calling for a recession in the US just yet, it is becoming a greater risk amid political uncertainty.

Therefore, stay careful with your credit exposure and watch out for the curve steepening!

 

 

 

 

Past performance is not indicative of future results. The views, strategies and financial instruments described in this document may not be suitable for all investors. Opinions expressed are current opinions as of date(s) appearing in this material only. References to market or composite indices, benchmarks or other measures of relative market performance over a specified period of time are provided for your information only. NS Partners provides no warranty and makes no representation of any kind whatsoever regarding the accuracy and completeness of any data, including financial market data, quotes, research notes or other financial instrument referred to in this document. This document does not constitute an offer or solicitation to any person in any jurisdiction in which such offer or solicitation is not authorized or to any person to whom it would be unlawful to make such offer or solicitation. Any reference in this document to specific securities and issuers are for illustrative purposes only, and should not be interpreted as recommendations to purchase or sell those securities. References in this document to investment funds that have not been registered with the FINMA cannot be distributed in or from Switzerland except to certain categories of eligible investors. Some of the entities of the NS Partners Group or its clients may hold a position in the financial instruments of any issuer discussed herein, or act as advisor to any such issuer.  Additional information is available on request.
© NS Partners Group

Hedge funds: what positioning for 2024?

Preference for macro, equity and credit long/short strategies, but caution on multi-manager platforms.

A MIXED 2023

While equities enjoyed a positive start to 2023, hedge funds got off to a more mixed start. Indeed, following fears of a global economic slowdown, long/short equity managers started the year on a cautious note, maintaining a rather low net exposure to the market. For their part, global macro managers were hit by sharp reversals in trends, highlighted by the record fall in US 10-year yields following the regional banking crisis in the United States and the collapse of Credit Suisse.

Finally, after a remarkable 2022, relative value strategies, now dominated by the large multi-manager platforms, also stalled and were unable to keep pace with the rise in risk-free rates, which is their minimum target. But in the end – and it is true that the last two months of the year were particularly favourable – a diversified hedge fund portfolio was able to post a double-digit net return in 2023.

WHAT CAN WE EXPECT FROM 2024 AT MACRO LEVEL?

What about 2024? We are currently at a crossroads in terms of monetary policy. In fact, with the exception of Japan, the major central banks are now prepared, in the more or less short term, to lower their interest rates depending on the trend in inflation and economic growth. For their part, although the opinions of macro managers vary considerably, they generally agree that the market is hoping for a faster rate cut in the United States than might actually occur. With interest-rate volatility higher than that of equities, managers have reduced their risk allocations.

Certain themes, which did not always pay off in 2023, are still present in portfolios, such as bets on metals linked to the energy transition, particularly copper, on the normalisation of Japanese monetary policy and on long positions in certain emerging markets (Brazilian interest rates, Mexico, credit). After a year of contrasting results in 2023, macro managers should be well positioned to take advantage of volatility on the fixed-income, currency and commodities markets.

A STABILISED ENVIRONMENT FOR LONG/SHORT EQUITY MANAGERS

The ‘soft landing’ scenario that seems to be holding sway is giving a little more peace of mind to long/short equity managers, who have significantly increased their net exposure to the market in recent months. But make no mistake: good global long/short managers have posted returns of between +15% and +20% in 2023 – compared with an MSCI World index up by +21.8% – which constitutes positive alpha generation, firstly because of their exposure to the market of only around +60% and secondly because of their underweighting of the seven technology megastocks that have driven the market. Even Asian managers with a bias towards China posted positive returns over the past year, while the MSCI China index fell by -13.2% in 2023.

On the other hand, if there is one strategy that shows a little more cyclicality, it is the long/short equity strategy. At this stage, we believe that we are still in a cycle of rising alpha generation. What’s more, with the normalisation of interest rates and the fact that we are finally being paid to short stocks, we believe that a selection of good long/short managers is a good complement to an equity allocation in a portfolio. Perhaps it’s time to diversify your geographical allocation a little outside the US.

QUESTIONS ABOUT MULTI-MANAGER PLATFORMS

Multi-manager platforms have been the big winners in recent years. Since 2017, their assets under management have increased by +186% and the seven largest platforms, including Citadel, Millennium, Point 72 and Balyasny, now account for over 60% of the market share in this category. The asset class approaches and exposures vary from one company to another, so it is not always easy to compare them. That said, they are now waging a merciless war to attract the best traders, who are paid handsomely, which has an impact on costs.

In these platforms, a successful manager can receive performance fees even if the overall result is zero or even negative, which translates into what is known as ‘netting risk’. This risk can materialise more quickly if the performance of the funds falls short of expectations. For platforms that have experienced rapid growth, it will be necessary to digest the assets and assess whether there is any dilution of the added value in the final result. In addition, with liquidity requirements having become more restrictive, we now have to be very selective.

Finally, to conclude our overview of the positioning to adopt in 2024, we believe that good long/short credit managers should be able to generate attractive returns in the market environment that awaits us over the next few months.

In conclusion, the key to obtaining a satisfactory result from your hedge fund portfolio is to define your expectations clearly, as the construction and development of your portfolio will depend directly on this. To be successful, however, you need to bear in mind two important factors: firstly, you need to make a good selection beforehand, and secondly, you need to be as contrarian as possible.

November General Market Comments

November General Market Comments

“The Lifeboat Party” – Kid Creole and the Coconuts, 1983.

During tumultuous times, high grade Government bonds are often considered as the lifeboat for investors, who can park their money there, waiting for better days to arise, or simply because they expect more dovish monetary policies down the road, which would push yields down and, hence, prop up fixed-income prices.

November 2023 has clearly responded to this logic, with both arguments validated: after two horrendous months for equities, there was a need for safer havens on the one hand, and, on the other hand, slowing inflation and cooling economic statistics buoyed the idea that Central Banks (and especially the Fed) were done raising rates, and that cuts might come sooner than expected.

The strength of the rebound  in November has been spectacular; the fixed-income lifeboat party has dragged all assets in its wake, from equities, to credit and Gold.

The MSCI World has gained 9.2%, the S&P 500 8.9%, the Stoxx 600 6.5%, the MSCI Emerging Markets 7.9%, and the Topix 5.4%. In the context of falling yields (-60 basis points for the US 10 year and -36 for the German Bund), Growth has, again, dominated with a 11.1% rise for the MSCI World Growth versus +7.1% for the MSCI World Value. On a year to date basis, the performance gap is immense (+30.2% versus +3.3%). It is noticeable that the “fear gauge”, in other words the VIX Index, has cratered by almost 29% in November, and is now down more than 40% for 2023.

As said, Gold glittered and gained 2.7%, quite a normal feat when yields fall, and the dollar receded versus all currencies.

“This party is in honour of the will to survive” says Kid in his 1983 hit; although there are chances that December remains quiet, we can wonder who’s gonna survive in 2024, to either an economic downturn, or a renewed rout of rising rates if the economy holds better than expected. Something will have to give.

That’s it for this month’s Market Comments, stay tuned, markets never skip a beat.

 

 

 

Past performance is not indicative of future results. The views, strategies and financial instruments described in this document may not be suitable for all investors. Opinions expressed are current opinions as of date(s) appearing in this material only. References to market or composite indices, benchmarks or other measures of relative market performance over a specified period of time are provided for your information only. NS PARTNERS SA provides no warranty and makes no representation of any kind whatsoever regarding the accuracy and completeness of any data, including financial market data or other financial instruments referred to in this general comment. This document does not constitute an offer or solicitation to any person in any jurisdiction in which such offer or solicitation is not authorized or to any person to whom it would be unlawful to make such offer or solicitation. Any reference in this document to specific securities and issuers are for illustrative purposes only, and should not be interpreted as recommendations to purchase or sell those securities. References in this document to investment funds that have not been registered with the FINMA cannot be distributed in or from Switzerland except to certain categories of eligible investors. Some of the entities of the NS Partners Group or its clients may hold a position in the financial instruments of any issuer discussed herein, or act as advisor to any such issuer. Additional information is available on request. © NS Partners Group

July General Market Comments

July General Market Comments

«The Magnificent Seven» – The Clash, 1980

“Gimme Honda, gimme Sony, so cheap and, real phony” goes Joe Strummer in this legendary song from the Clash. We could transpose this into “Gimme Tesla, gimme Meta” today, as those two stocks stand among the magnificent seven performers of 2023 so far (with Alphabet, Microsoft, Amazon, Apple and Nvidia); the difference is that they don’t seem phony, and, for most of them, they’re far from being “so cheap”. In fact, these seven companies contributed to more than 55% of the performance of the S&P500 this year, which means that we could easily talk about a S&P 7 versus a S&P 493.

July 2023 has been a good month, again, for all risk assets: the MSCI World added 3.3%, the S&P500 3.1%, the Stoxx 600 2% (but the euro rose 0.9% versus the greenback), the Topix 1.5% (the Yen being up 1.5% versus the dollar after the change of tone from the BoJ regarding its yield curve control), and finally Emerging Markets caught up with a 5.8% return.

Styles reverted a smidgen on a global basis, with the MSCI World Value advancing more than the MSCI World Growth (3.7% versus 2.9%). One can still feel flummoxed when looking at the performance gap between both indices this year, Growth being up 30.2% versus a meagre 6.3% for Value. All hopes of a return to the mean between styles have been dwarfed in 2023.

July has also been very profitable for Credit, again, as the Itraxx Crossover added 1.5%, for Commodities (Gold up 2.4%, Oil 15.8%), which finally leaves Government Bonds as the only outliers with rising yields overall: +12 bps for the US 10 year, +10 for Bunds and +21 for JGBs.

That’s it for this month’s Market Comments, stay tuned, markets never skip a beat.

 

 

 

 

Past performance is not indicative of future results. The views, strategies and financial instruments described in this document may not be suitable for all investors. Opinions expressed are current opinions as of date(s) appearing in this material only. References to market or composite indices, benchmarks or other measures of relative market performance over a specified period of time are provided for your information only. NS PARTNERS SA provides no warranty and makes no representation of any kind whatsoever regarding the accuracy and completeness of any data, including financial market data or other financial instruments referred to in this general comment. This document does not constitute an offer or solicitation to any person in any jurisdiction in which such offer or solicitation is not authorized or to any person to whom it would be unlawful to make such offer or solicitation. Any reference in this document to specific securities and issuers are for illustrative purposes only, and should not be interpreted as recommendations to purchase or sell those securities. References in this document to investment funds that have not been registered with the FINMA cannot be distributed in or from Switzerland except to certain categories of eligible investors. Some of the entities of the NS Partners Group or its clients may hold a position in the financial instruments of any issuer discussed herein, or act as advisor to any such issuer. Additional information is available on request. © NS Partners Group

June General Market Comments

June General Market Comments

« Driver’s Seat » – Sniff ‘n’ the Tears, 1978

AI, Big Tech and consequently the Nasdaq are in the driver’s seat in 2023. They’ve set the pace for what is, so far, a very good year for global equity markets, notwithstanding the immense performance gap between sectors and styles: to wit, the MSCI World Growth is up 26.5% at the end of June, versus only +2.5% for the MSCI World Value.

June 2023 saw, from the middle of the month, some kind of marginal rebalancing: upside participation has been a tad broader than previously this year, which is healthy (the S&P 500 and the Nasdaq ended up the month with almost exactly the same performance, slightly below +6.5%). This is also logical because interest rates were not supportive of expanding valuations last month: the US and German 10 year yields respectively rose 19 and 11 bps.

In the meantime, Credit was up again (+2% for the Itraxx Crossover in June, +7.6% year to date), Gold lost ground (-2.2%) as well as the dollar versus the euro. Currency markets have also shown some large moves this year, as the euro is up 1.9% versus the dollar, but the most impressive is the Japanese Yen fall (-10.1%) and, to a lesser extent, the Chinese Renminbi (-5.2%). The spectacular 21% upside in the Topix finally “only” translates into a +10% return year to date in USD.

Markets seems to tell us that the Fed will succeed in engineering a soft landing in the US, especially if upside participation broadens; markets often lead fundamentals, so this should be viewed as good news. What remains unclear is the capacity for valuations, and in particular for the most hype sectors, to stay at these levels.

That’s it for this month’s Market Comments, stay tuned, markets never skip a beat.

 

 

 

 

Past performance is not indicative of future results. The views, strategies and financial instruments described in this document may not be suitable for all investors. Opinions expressed are current opinions as of date(s) appearing in this material only. References to market or composite indices, benchmarks or other measures of relative market performance over a specified period of time are provided for your information only. NS PARTNERS SA provides no warranty and makes no representation of any kind whatsoever regarding the accuracy and completeness of any data, including financial market data or other financial instruments referred to in this general comment. This document does not constitute an offer or solicitation to any person in any jurisdiction in which such offer or solicitation is not authorized or to any person to whom it would be unlawful to make such offer or solicitation. Any reference in this document to specific securities and issuers are for illustrative purposes only, and should not be interpreted as recommendations to purchase or sell those securities. References in this document to investment funds that have not been registered with the FINMA cannot be distributed in or from Switzerland except to certain categories of eligible investors. Some of the entities of the NS Partners Group or its clients may hold a position in the financial instruments of any issuer discussed herein, or act as advisor to any such issuer. Additional information is available on request. © NS Partners Group

July General Market Comments

July General Market Comments

« Whose Side Are You On? » – Matt Bianco, 1984

Are you on the optimists’ or the pessimists’ side? Or rather on the side of those who have no idea?

So far, 2022 tends to plead in favour of the pessimists, but optimists could argue that July 2022 was the best month for the S&P 500 since November 2020 (when Pfizer-BioNTech announced they had a vaccine against Covid), and those who have no idea could point out that finally markets were roughly flat for June-July 2022, as June was a dreadful month.

There are many things to factor in, and all of them give arguments to one side or another: inflation is high, but expected to normalize, especially since Central Banks seem keen on tackling it rapidly; geopolitics are a mess with not only the conflict between Russia and Ukraine, but also the heightened tensions between the US and China regarding Taiwan; corporate and private debt does not seem to be a source of problems today, but Government debt across developed markets is immense; earnings reports have been surprisingly good so far, but they are expected to slow down significantly going forward; commodities do not move in sync, but there seems to be a growing threat from Russia about gas deliveries in Europe for this winter, triggering skyrocketing gas prices. With all this happening at the same time, it is not easy to choose your side and it’s not surprising to see numerous experts change their minds, depending on the most recent events.

Buoyed by convincing earnings releases and some more risk appetite, equity markets soared in July: the MSCI World gained +7.86%, the S&P 500 +9.11%, the Nasdaq +12.55%, the MSCI Europe +7.52% and the Topix +3.71%. The only detractor was Emerging Markets, down 0.69%. As nominal and real yields fell, Growth outperformed Value with a +11.51% return for the MSCI World Growth versus +4.44% for its Value counterpart.

In such a risk-prone month, Credit also rose (+3.06% for the Itraxx Crossover), and Government yields fell (-36 bps for the US 10 year, -52 bps for Germany); Gold and Oil receded by 2.29% and 6.75% respectively, and the Euro fell further against the dollar (-2.51%), weakened by the possible looming energy crisis in Europe and an unfavourable interest rate differential.

That’s it for this month’s Market Comments, stay tuned, markets never skip a beat.

 

 

 

 

Past performance is not indicative of future results. The views, strategies and financial instruments described in this document may not be suitable for all investors. Opinions expressed are current opinions as of date(s) appearing in this material only. References to market or composite indices, benchmarks or other measures of relative market performance over a specified period of time are provided for your information only. NS PARTNERS SA provides no warranty and makes no representation of any kind whatsoever regarding the accuracy and completeness of any data, including financial market data or other financial instruments referred to in this general comment. This document does not constitute an offer or solicitation to any person in any jurisdiction in which such offer or solicitation is not authorized or to any person to whom it would be unlawful to make such offer or solicitation. Any reference in this document to specific securities and issuers are for illustrative purposes only, and should not be interpreted as recommendations to purchase or sell those securities. References in this document to investment funds that have not been registered with the FINMA cannot be distributed in or from Switzerland except to certain categories of eligible investors. Some of the entities of the NS Partners Group or its clients may hold a position in the financial instruments of any issuer discussed herein, or act as advisor to any such issuer. Additional information is available on request. © NS Partners Group