OUTLOOK

From a credit standpoint, we have possibly seen the strongest results of financials in the past decade. We have seen capital and excess capital at very high levels. This is despite all the issues linked to Covid-19, as well as the provisions for expected credit losses that banks took in the last 15 months. Due to the very strong credit metrics of the companies we own, we feel we have strong visibility regarding the income we will receive. Moreover, we expect financials to remain very strong going forward, especially as they could benefit from interest rates rising as their profitability should increase. Additionally, due to our exposure to fixed-to-floaters and floaters, we are well positioned for a period of rising rates. At the same time, we are capturing spreads of around 310 bps within subordinated debt of financials. Unlike in other parts of the bond market where spreads are near historical lows, valuations on subordinated debt of financials remain attractive and are wider than pre-Covid-19.

 

To summarise, our outlook remains positive, as the credit quality within our companies remains very strong. This ensures strong visibility of high income within the current low interest rate environment. At the same time, as we have seen, we have a low sensitivity to interest rates. Valuations remain wider than pre-Covid-19 levels, and therefore we expect to benefit from potential price appreciation. Finally, technicals are supportive. The first half of the year was marked by a healthy supply of issuance, which helped to maintain a balanced market. However, we expect a limited net supply in the second half of the year. Consequently, demand should be higher than supply, which should support the valuation of the securities held within our fund.

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