Equity indices peaked early February before declining gradually into March. The S&P500 halved its YTD gains ending the month at +3.4% YTD, while EM equities ended flat YTD. Only EZ/UK equities stood out recording small gains in February. The DM macro news flow provided contradictory signals, pointing to a stronger growth resilience and questioning the disinflation trend investors were widely expecting. Consequently, it now seems very likely that DM Central Banks will extend their hiking cycle well into Q2 2023 and that DM bond yields will stay higher for longer, in order to avoid a resurgence of inflationary pressures in H2 2023. Also, the ECB will soon join the Fed with its QT program, tightening further global liquidity conditions from Q2 2023 onwards. Going forward, the main question remains whether this hawkish shift in Central Banks’ policy will divert DM economies from the expected soft-landing path into a recession. Bond markets have already sold off ahead of the March FOMC/ECB policy meetings, with the US/EZ Treasury 2y yields rising above their November peaks, driving higher the USD. Higher yields mean the overvaluation of US equities has extended to more extreme levels, also supported by the speculative retail trading activity. The current upbeat investors’ sentiment remains in sharp contrast with the upcoming tighter liquidity conditions, which have always been a strong headwind for equity performances. Finally, following the Q4 2022 reporting season, the next 12mth earnings growth forecasts have turned negative for the S&P500, confirming an “earnings recession” in Q2/Q3 2023. In conclusion, actual equity rally will be challenged soon as the support for equities is likely to fade away given their unattractive risk-reward.

The Fund recorded a positive return in February, despite the bond market selloff and equity indices declines. Given the high uncertainty on fundamentals, the Fund’s defensive positioning, i.e. a large cash holding (although remunerated above 4% p.a.), was maintained along the month. Reinvestments in income notes did take place every time the equity volatility spiked, enabling to maintain a Fund’s weighted average yield of 8.2% p.a.. Also illustrating the Fund’s defensive stance, the residual downside protection of the income note allocation is now 18.4%, with a short-dated average maturity of 7.1 months.