Brevan Howard-managed BH Macro (BHMG) reported annual results spanning the 12-month period to 31 December 2020. During the year ended 31 December 2020, the NAV of the sterling shares increased by 28.09% and the NAV of the US dollar shares (BGMU) increased by 28.86%. The share price total return on sterling and US dollar shares was 34.87% and 31.39%, respectively.
Comments from the manager – ‘policymakers commitment to a risk-friendly environment and associated heterogeneity in policy responses sets up interesting cross-country trading opportunities’
“Coming into the year, the Master Fund had been positioned in anticipation of monetary policy easing by the Federal Reserve (Fed) in response to a slowdown in economic activity combined with the view that this slowdown was being significantly underappreciated by the market. As the COVID-19 crisis began to unfold in February, it became apparent that transmission was global and had the potential to cause unprecedented economic damage which would be met with equally unprecedented fiscal and monetary policy responses. In the event, the global economy is estimated to have contracted by as much as in the first year of the Great Depression and by more than in the Great Financial Crisis. In response, most countries delivered sizable fiscal relief while many central banks cut rates to nearly zero, restarted quantitative easing, and rolled out a wide variety of ambitious lending programs — measures that provided a safety net for risk assets. During this year, the Master Fund added to directional and relative value strategies across a range of global interest rate markets. In March, the Fed was forced into making two emergency cuts totalling 150bps and risk markets fell sharply. Gains over this year came from a range of strategies including directional trading of US and global interest rates, macro-RV trading in European government bonds, LIBOR-basis and option volatility positioning as well as from directional and option strategies in equity, credit, oil and precious metals. Moving into the second quarter, gains were crystallised, risk levels reduced, and the Master Fund adopted a less directional and more tactical approach. During the balance of the year, the fund profited from recovery trades in credit and equity markets as well as from tactical short and curve steepening positioning in the US interest rate market. The fund also positioned in currency markets to benefit from the relative economic outperformance in much of Asia versus the US resulting from tighter control and mitigation of the coronavirus pandemic as well as from the likely impact of the US elections in terms of additional fiscal support.
Looking forward, the first half of 2021 should see an uneven recovery as governments respond to the third wave of COVID-19. In some countries mass vaccination is proceeding efficiently; in other countries it has been delayed for a variety of reasons. At the same time, new more transmissible variants of COVID-19 have strained public health systems and led to additional restrictions on social and economic activity. As vaccine distribution and uptake improve, the expectation is for a brisk rebound of the service sector in the second half of the year. Highly accommodative monetary policy will help underpin risk sentiment and fiscal easing will provide targeted relief. However, the magnitude of the fiscal response differs across countries, with the US at one extreme rolling out multiple trillion-dollar programs and China at the other extreme with some withdrawal of fiscal support. While policymakers are generally committed to providing a risk-friendly environment, the heterogeneity in policy responses sets up some interesting cross-country trading opportunities. In emerging markets, some countries have been hit especially hard by COVID-19, others less so. North Asia and Australia & New Zealand have generally been standouts with successful public-health responses and gearing to the recovery in global trade. In terms of themes, reflation and inflation will be a strong focus. Some analysts argue that the reopening of the global economy will generate inflation and others argue that the global economy is still stuck in secular stagnation. Regardless, the big increase in oil and industrial commodity prices means that many investors are looking for a sustained rebound in the commodity complex and concomitant decline in the US Dollar against emerging market currencies. In any event, monetary policy is tuned to try and create inflation in all the major developed market economies, especially in the US where the Fed promises to overshoot its traditional 2% target. At a minimum, that commitment points to low rates for years. If successful, a return of inflation would be a remarkable macroeconomic development against a backdrop in which investors have become complacent about inflation. Finally, politics is not going away in 2021. There are a number of loose ends accompanying Brexit, the Eurozone project is still a work-in-progress, and geopolitical tensions remain with the US-China relationship perhaps being the most important hotspot.”
BHME/BHMG/BHMU: Brevan Howard-managed BH Macro has a great 2020