Axiom European Financial Debt (AXI), which was established to take advantage of change in the regulatory environment applying to the capital structures of financial institutions, has reported results for the half-year period to 30 June 2020. The NAV total return, net of all expenses, came to (7.9%).
William Scott, AXI’s chairman, notes that “AXI’s manager has positioned the portfolio for defensiveness and liquidity while continuing to search out new opportunities. The effect of COVID-19 has been profound and its impact on some sectors nothing short of a disaster; for others, it has been a bonanza. The full effects will take time to flow through fully and manifest themselves in the balance sheets of banks. It is pleasing to note that the recovery in the economy seems at present to be quicker than might have been feared. We must, however, recognise the possibility that there will be future “waves” of the pandemic and it will be some time before the pandemic can be declared “over”. In the meantime, we also should bear in mind that the major themes that concerned markets before the pandemic are still there, even if they are not so prominent in the news as they would otherwise have been: the US-China trade tensions, Brexit, and of course the regulatory change in the financial sectors that the Company was created to exploit.”
‘Reservations on the near term outlook for the banking sector’
AXI’s manager, Gildas Surry, notes that “As the COVID-affected countries come out of lockdown and try to restart their economies and bring them back to a normal level, the authorities continue to deploy the measures deemed necessary.
As for the banks, they continue to be part of the solution and the authorities expect them to continue playing their role in lending to the economy. For this, the banks are offered the funding they can wish for at a negative cost from the ECB through the TLTROs, and are granted a significant relief in their capital requirements through the CRR Quick Fix and in their RWAs through the state guarantees.
In this context, we can only express reservations on the near-term outlook for the banking sector and its capacity to restart paying out capital to equity investors. However, non-equity capital instruments continue to offer a vast array of opportunities.
We take note of the historically tight valuations on a highly uncertain backdrop, and keep our portfolio liquid and defensive. Still, we continue to search for value in the banking and insurance sectors across the different categories of instruments: discounted bonds, fixed-to-fixed, long calls, and other make-whole structures. The end of the Basel III grandfathering period in December 2021 is getting closer and, over the next six months, we will watch for the EBA guidance on legacy instruments as the next catalyst to our bond selection.”
About AXI
AXI seeks to identify investment opportunities presented by the Basel III and Solvency II transitions in Europe. It aims to provide its shareholders with an attractive return, while limiting downside risk, through investment in regulatory capital instruments, other financial institution investment instruments and derivative instruments.
AXI: Axiom European Financial Debt expresses caution towards the banking sector