Amplus Q2 2024 Fund Commentary: Strategic Positioning Amid Rate Cuts
We are pleased to report Amplus Credit Income Fund closed up +2.47% for the second quarter of 2024, while year-to-date returns stood at +5.48%.
Credit Update and Forward Outlook
In Q1, we saw a strong bid for risk assets, allowing both equity markets and credit markets to perform. This most recent quarter saw a divergence between both asset classes, with credit spreads widening despite equity markets reaching new highs. Q2 saw Canadian credit spreads +1.5bps wider and U.S. credit spreads +4bps wider. In Canada, record June issuance of $21bn, double the 10-year average for the month, caused secondary markets to widen. As expected, inaugural issuer Coastal GasLink finally came to market with an 11-tranche $7.5bn debt deal, which rallied 20bps immediately in secondaries. The size required a greater-than-normal concession, repricing many credits that came out against the deal.
The highlight was June’s Bank of Canada (BoC) rate decision: cutting by 25bps the overnight rate to 4.75%. The BoC became the first G7 central bank to cut rates having left it unchanged for nearly one year. The BoC explained its decision as a reaction to significant advancements in underlying price pressures, both in its preferred measures of core inflation and widespread amongst components. The BoC did not finalize any actions for its July decision, but during BoC Governor Macklem’s press conference opening statement, he tentatively indicated that “expecting further cuts to our policy interest rate would be reasonable.” Ahead of the meeting, the market was pricing a 70% chance for a June cut. The decision allowed rates to rally throughout the month.
Performance for Amplus was driven by:
- Portfolio yielding 8-8.5%
- Rate and credit positioning benefiting from the BoC rate cut
- Overweight exposure to REITs, which benefitted from lower rates
- Exposure to Videotron which got upgraded to investment grade from high yield
- New bond supply in June that came at a concession
- Long $25 bank preferred shares being refinanced in the institutional markets at economic terms for the issuer
Most bank supply, which normally makes up a large part of bond issuance, continued to be done outside of Canada, allowing spreads to outperform its U.S. denominated bonds. As markets weakened into the second half of June, on the back of heavy non-bank corporate supply, we chose to slightly increase our credit exposure in banks that were 7-8bps wider, already trading undervalued to U.S. denominated bonds. Seasonally, our experience has shown that July tends to be a strong month for 3-5yr credits. We tactically lightened up and reloaded on rates throughout Q2 volatility. Our proprietary research continues to see merit in being long interest-rates as the risk-reward and historical valuations justify some exposure.
Going forward, we are mindful of the recent trend in weaker economic headlines. History has shown a real risk of unemployment overshooting when cycles turn. Below are charts from economic data released in the last week, and they all highlight the strong possibility of slower economic growth in the second half of this year. This reinforces our recent decision to shift our portfolio mix such that we have more dry powder if and when a slowing economy truly impacts risk assets, all the while getting paid well to wait. Break-evens on the portfolio have increased, allowing for a greater margin of safety.
The 4-week moving average rose by +2K, to a 43-week high:
U.S. INTIAL UNEMPLOYMENT CLAIMS
The 4-week moving average grew by +17k, also to a new cycle high:
U.S. CONTINUING UNEMPLOYMENT CLAIMS JUNE 22: 1,858
ISM’s services PMI plunged -5.0% in June, to 48.8%, a post-pandemic low. Business activity (-11.6%) and new orders (-6.8%) paced the fall.
U.S. NON-MFG PMI (ISM), JUNE: 48.8%
U.S. NON-MFG PMI (ISM), BUSINESS ACTIVITY JUNE: 49.6%
U.S. NON-MFG PMI (ISM), NEW ORDERS JUNE: 47.3%
Bankruptcies jumped to a 13-year high:
U.S. CHAPTER 11 BANKRUPTCIES, 3 MO. AVG. JUNE: 763
U.S. UNEMPLOYMENT RATE, JUNE: 4.1%
