Commentaries

Commentaries

6 June 2024

Strata Credit Monthly Comment - May 2024

Improving inflation data, growing hopes for a soft landing, and expectations for a market-friendly pivot from Central Banks spurred a powerful risk-on rally during the month of May. Credit also posted a very strong performance, spurred by a positive end of earning season. 

The European Central Bank (ECB) appears set to be the first major central bank to cut rates at its 6th June meeting next week. This could lead to a divergence from the US Federal Reserve given stronger-than-expected US economic data and the likelihood that the US central bank will maintain its current monetary policy stance. US inflation posted a higher-than-expected 3.4% annual increase in April, bolstering expectations that the Fed may have to delay policy easing. Eurozone inflation rose to 2.6% in May – up from 2.4% in April – but remains well below the 10% level reach reached in late 2022. This is all but fully priced in by rates markets, but what comes after the next rate cut will be more difficult for the ECB to communicate and for markets to price. While significant progress has been made in bringing inflation back to target, the path of inflation from here is likely to be more turbulent. Combine this with an improving growth outlook across the eurozone, and markets may be less confident of the future path of ECB base rates, and lean towards pushing out some cuts in 2025 – as has been the case in recent weeks.

Over the course of 2024, we have seen dispersion take hold as a number of idiosyncratic stories have affected returns, in particular in the more highly leveraged parts of the market. We remain cautious on lower-rated segments of the market, preferring to be up in quality where carry is still attractive but credit fundamentals are more robust. From a sector perspective, we maintain a preference for less cyclically exposed parts of the credit universe. During the month, we deployed new capital into selected BB new issues, with a bias towards European defensive issuers and structured credit, particularly BBB CLOs. We continued looking for opportunities to reduce exposure to more cyclical single B corporates that we believe have become fairly valued and with limited upside potential.

The path from here for most credits is still constructive. We think the likelihood of a significant deterioration in credit is low at the moment, and spreads/defaults will continue to remain relatively well-anchored as we move through the second half of this year.  We see scope for further spread tightening over the course of the year, albeit we expect much of the return to come from carry. We expect idiosyncratic events, dispersion in the lowest tier, and some losers to emerge. In such an environment, company selection based on rigorous fundamental analysis will remain key. 

*Rating source: RAM AI. Date of rating as of end of the month.
 

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Important Information

The Strata strategy is applied to the Strata Credit sub-fund that was transferred on 30.05.2024 from the Luxembourg FCP Palladium to the Luxembourg SICAV RAM (Lux) Tactical Funds II

Please note that the performance shown reflects periods before the sub-fund’s transfer and was achieved under different regulatory and operational conditions, which may no longer apply. Notwithstanding this, the performance is based on investment objectives and policies that have not materially changed following the sub-fund's transfer and is attributable to investment objectives, policies, restrictions, and strategies that are compliant with UCITS regulations. The investment management function remains consistent, with no changes to the team responsible for managing the fund after the transfer. Importantly, there has been no material change in the level of fees charged to investors as a result of this transfer. For further information, please refer to the Prospectus.

The RAM (Lux) Tactical Funds II – Strata Credit Fund is a Sub-Fund of RAM (Lux) Tactical Funds II, a Luxembourg SICAV with registered office: 14, Boulevard Royal L-2449 Luxembourg, approved by the CSSF and constituting a UCITS (Directive 2009/65/EC). The sub-fund STRATA CREDIT FUND was been created in the RAM (LUX) Tactical Funds II SICAV to receive the PALLADIUM FCP – RAM Mediobanca Strata UCITS Credit Fund sub-fund. The transfer was effective on 30th May 2024.

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