After April’s correction, equity markets bounced back in May, led by the US market and its megacap tech stocks. However, equity indices failed to extend their gains beyond March-end peak, showing signs of reversal at the end of the month. YTD price performances are approx. +10% for US/EZ equities, with EM lagging at only +4%. The lack of trend in equity markets since March-end is directly related to the persisting uncertainty in the economic scenario for DM economies for the next 6-months. As both inflation indices and job markets remain stronger than expected, DM Central Banks had to remove the dovish bias in their guidance to show more caution in the timing and magnitude of the widely expected rate cut cycle. At the same time, the US economy has recently demonstrated signs of growing weakness. Although much softer economic data validate investors’ soft-landing central scenario, the “higher for longer” short-term rates create the risk of entering a period of stagflation for the rest of the year, which would be an adverse configuration for equity markets. As a result, the much more market-friendly goldilocks scenario of monetary easing in a resilient growth environment does remain possible, but with a much more eroded probability than at the start of the year. Finally, the odds of more extreme scenarios, like a recession in the US or a sharp rebound in GDP growth driven by fiscal spending post US-elections, are also rising. This greater uncertainty on macro fundamentals with bigger tail risks cannot justify the extreme richness of US equities and does prevent markets from entering a new bull extension, despite solid earnings released for Q1 2024. As a result, it looks more likely that the double-digit earnings growth expected in 2024/25 will first lead to valuation decompression, followed by a much milder equity performance going forward. Also, equity volatilities should bounce back from their historically low levels soon.

The Fund was up +0.7% (A, USD) in May, achieving a YTD return equivalent to 7.2% annualized, still lagging its annual objective of short-term interest rate + 3%. The current low equity volatility backdrop was the main drag to the performance YTD. The rebound in equity markets early May resulted into new early redemptions in the Fund’s portfolio this month, with reinvestments executed at slightly lower yields. As a result, the Fund’s running yield declined by 0.6ppt to +9.2% p.a. (USD, gross). As of 31/05, the downside protection of the income notes allocation was at +18%, with 6-month average maturity.