Morning Note: Market news and updates from BH Macro and Hays.
Market News
US equity markets bounced last night – S&P 500 (+1.4%); Nasdaq (+2.2%) – spurred on by tech stocks. Boeing endured a heavy fall following the grounding of the 737 Max jets. Juniper surged 22% postmarket after the WSJ reported HP Enterprise is in talks to buy the company for about $13bn.
This morning in Asia, markets were firm as the China central bank signalled that it’s prepared to keep policy loose with possible Reserve Ratio cut: Nikkei 225 (+1.2%, to a 34-year high); Hang Seng (+0.1%); Shanghai Composite (+0.2%). The yen extended gains after the Bank of Japan signalled it will reduce its monthly buying of super-long government bonds. The FTSE 100 is currently trading 0.2% higher at 7,704.
The Fed’s Raphael Bostic said inflation has come down more than expected and is on a path to reaching the FOMC’s 2% target, but he doesn’t expect a rate cut until the third quarter. Michelle Bowman backed easing “eventually,” though she remains cautious about the upside risk to inflation. Wall Street analysts are at odds over when the Fed will start slowing the pace of its balance-sheet unwind.
The 10-year Treasury yield remained slightly above 4%. Bill Gross expressed caution over benchmark bonds. Ten-year Treasury yields at 4% are “overvalued,” while TIPS with the same duration are “the better choice” at 1.8%, he wrote in a post on X. Gold held steady at $2,035 an ounce. The oil price has steadied at $76.50 a barrel after losing 4% in the previous session, weighed down by signs of weakening market fundamentals as highlighted by Saudi Arabia’s price cuts.
UK Christmas retail sales disappointed as shoppers pulled back over the Christmas period – the BRC reported LFL sales of 1.9% during the month versus 2.4% expected. Sterling trades at $1.2733 and €1.1635.
Source: Bloomberg
Fund Update – BH Macro
Diversification across asset classes is a critical element of managing your investments. At Patronus, when we construct a portfolio, we look to allocate a proportion of capital to so-called ‘anti-fragile’ investments that provide shelter in difficult times when other (‘fragile’) asset classes (such as equities and bonds) are struggling to a generate positive return. We believe BH Macro is one such investment.
BH Macro is a London-listed closed-ended investment company that invests substantially all its assets in the ordinary shares of Brevan Howard Master Fund. Following the 2021 merger with BH Global (Brevan Howard’s other listed investment strategy), a larger entity with the same investment policy was created. There are sterling and dollar classes available and total company assets currently stand at just over £1.6bn. Fund fees are made up of a fixed component (management fee and operational services fee) of 2% and a 20% performance fee subject to a high water mark.
The objective is to generate consistent long-term appreciation through active leveraged trading on a global basis. Exposure is predominantly to global fixed income and currency markets, employing a combination of macro and relative value trading strategies. The Fund seeks to achieve positive returns, uncorrelated with other markets and with low volatility. The underlying philosophy is to construct strategies, often contingent in nature, with superior risk/return profiles, whose outcome will often be crystallised by an expected event occurring within a pre-determined period of time.
The decision to hold the shares depends on whether the Fund will provide capital protection during periods of market stress. In this regard, it has a good track record when equity markets are falling and has shown correlation with market volatility. Since inception in 2007 to the end of 2023, in the twenty worst performing months for equities, BH Macro has produced 18 positive monthly returns. Over the same period, the annualised NAV return is just below 9%, with volatility (i.e., annualised standard deviation of returns) of 8%. Drawdowns have been significantly lower than other assets classes.
In 2020, the Fund really proved its worth in the face of the challenges arising from Covid-19, with the NAV rising by 28% when the FTSE 100 fell by 11.6%. Again in 2022, when there was a marked pick-up in risk and volatility following the Russian invasion of Ukraine, the Fund generated another outstanding performance, rising by 22%, compared to an 8% decline in global equities in sterling terms and a 15% drawdown in UK bond markets.
In 2023, performance was more muted – the fund fell by around 2% – and well behind other asset classes: global equities in sterling terms (+16.8%), UK Gilts (+5.6%), and cash (+4.6%). The largest drawdown occurred in March when the banking crisis led to ‘a once-in-a-generation’ reversal in bond yields. Although the Fund was positioned for interest rates to rise further before peaking, the loss was capped off at around 4%, highlighting the manager’s focus on risk management.
Earlier in 2023, and in response to persistent requests from its shareholders, the company undertook a large placing of its shares. The fundraising increased the liquidity of the stock and spread the company’s fixed costs over a wider base. The initial offer in February raised £315m and the company has an ongoing programme to raise up to around £500m until 23 January 2024. However, the move has caused some indigestion and the shares have moved from a 19% premium to a substantial 11% discount, while the share price is almost 30% below its September 2022 peak. As a result, we see little prospect of a further share issue.
The overhang has been exacerbated by the merger of two of the company’s largest shareholders, Rathbones and Investec Wealth, which together own just under 30%. Recent disclosures highlight the new entity has started to reduce its holding. At the same time, BH Macro has started with buy back its shares, an accretive move given the current discount.
We remain very positive on the company given its portfolio diversification attributes at a time when the geopolitical and macro-economic outlook remain very uncertain and an extended period of calm like that between 2013-19 is very unlikely to be repeated. The current discount to NAV provides an added incentive.
Source: Bloomberg
Company News
Hays has this morning issued a weak trading update in which it has reduced its profit expectations. In response, the shares have been marked down by 14%, with industry peer Page Group also suffering from a negative read-across.
Hays is an international recruitment group, with 249 offices in 33 countries. The group has c. 12,300 employees working in a broad range of 21 professional and skilled sectors, including Accountancy & Finance, Construction & Property, and IT. The business is also well-diversified between temporary (59% of net fees) and permanent placement markets (41%). The private sector accounts for around 85% of fees, while three quarters is generated outside of the UK.
This morning, Hays has released results for the three months ended 31 December 2023, the second quarter of its June 2024 financial year. During the period, net fees fell by 10% in like-for-like (LFL) terms, impacted by a more difficult December, where fees fell by 15% (or by 13% on a working day adjusted basis). As a result of this slowdown, the group now expects pre-exceptional operating profit of c. £60m in the half-year to December 2023, below current market consensus expectations of c. £77m.
The permanent business endured the weakest performance with a 17% LFL decline as client and candidate decision-making slowed. The temporary business fell by 5%, with volumes broadly stable sequentially through the quarter, but down year on year as the group did not see the normal seasonal step-up in worker volumes.
The group’s largest market, Germany, was the most resilient with net fees flat in the quarter. Elsewhere, the group suffered heavy declines: UK & Ireland (-17%); Australia & New Zealand (-20%); and Rest of World (-11%).
Group consultant headcount fell by 5% in the quarter and by 12% year on year. Overall, actions to reduce costs during the half-year will deliver c.£30m in annualised savings, with further material savings expected in current half-year. As a result, the group expects to incur an exceptional restructuring charge of c.£12m.
The balance sheet remains strong, with net cash of £60m at the end of December. This is in line with management expectations, and after paying £68.3m in core and special dividends in the quarter.
The statement highlights that it is too early to say if December’s weakness reflects a sustained market slowdown or some placement deferrals, however, management expects near-term market conditions to remain challenging. Consequently, the company has accelerated its cost reduction and efficiency programmes, while focusing on increased operational performance. Looking ahead, the strategy is increasingly focused on enhancing the group’s leading positions in the most attractive and skill-short markets globally, including Germany, non-Permanent, and Enterprise clients.
Source: Bloomberg