Polar Capital Global Financials suffers during ‘highly volatile year’ – Polar Capital Global Financials (PCFT) has posted its half-year results for the six months to 31 May 2022. During this time, its NAV was down 2.2% while its benchmark delivered 1.7%.
The board said that the market environment in the first half of the company’s financial year was highly volatile. A background of much higher interest rate rises than expected and a major geo-political conflict is hostile for risk assets generally. Significant market dislocations and indiscriminate selling are typical of such environments, driven by risk reduction rather than value considerations.
Nonetheless, the board has declared a first interim dividend for the current financial year of 2.4p per share, the same level as in the previous financial year. The first interim dividend will be payable on 31 August 2022 to shareholders on the register on 5 August 2022. The board has been able to maintain the dividend level following careful management of distributable reserves and the improvement in the income generation of the underlying portfolio following the economic recovery from the COVID slowdown.
Statement from the chair
The difficulties policy makers will face in containing acute inflationary pressures, aggravated by the geopolitical fallout of the war in Ukraine, will overhang sentiment in capital markets into the second half of the Company’s financial year.
A growing consensus has emerged, even among central bankers themselves, that the major central banks have been caught out by keeping easy money too excessive for too long. Now they must race to catch up, restoring financial conditions to ‘equilibrium’ to contain demand-driven inflation at the same time as supply shocks are driving global prices inexorably higher across a wide range of commodity and goods markets.
At the time of writing markets are adjusting from the ‘inflation is transitory’ mantra first touted by central bankers to the rude awakening that not only is the two decades-long era of limitless cheap liquidity over, but that it will be reversed. These are challenging waters for policymakers to navigate as market participants debate whether the result will be a significant slowdown in activity at best or stagflation/global recession at worst. As QE evolves into QT (Quantitative Tightening), the shape of major market yield curves suggests that the risk of recession is beginning to be priced into asset values.
At the heart of the economic system, the financial sector is not immune to the deterioration in sentiment and the remarking of asset values. However, in contrast to the global financial crisis, this time banks, and financials more generally, are not leading but following the broader trends in capital markets.
Banks specifically are in a much stronger position to withstand financial and economic headwinds than at any time since the global financial crisis. They have deleveraged significantly, cleaned up balance sheets, strengthened capital resources and improved operational efficiency. Furthermore, given the low/negative interest rate environment of the past few years, banks stand to see the benefit of higher official interest rates flow straight through to the bottom line.
In the meantime, financials, traditionally placed in the ‘cyclical’ group of sectors, will not be immune to the negative sentiment around the deterioration in the economic outlook. However, when the dust settles on this market adjustment and the resilience of banks in particular to the latest economic disruption becomes apparent, the lower valuations currently being experienced will become, in the view of the Board, very attractive once again. The Manager, having taken defensive measures by reducing gearing and switching to more defensive stocks such as insurance companies, is well positioned to exploit the opportunities that significant market dislocations present.
PCFT : Polar Capital Global Financials suffers during ‘highly volatile year’