MARKET ENVIRONMENT
Spreads of the securities held within our fund remained relatively stable in July, despite concerns linked to the Delta variant of Covid-19 and Asian equities. We continued capturing strong income from our holdings. This, combined with the fall in interest rates during the month, should make our bonds look even more attractive. Moreover, we benefited from some idiosyncratic stories, such as Rabobank 6.5% securities, which performed strongly following a decision by the European Central Bank (ECB) to remove the cap on dividend payments for European banks. We believe that conditions will lead to some spread tightening within our asset class over the coming months.
We are in the middle of the Q2 2021 earnings season, and results from financials have been strong so far. This is due to robust underlying income combined with provision releases or lower provisions than expected. As an example, NatWest released GBP 605 million of provisions (ie reversing expected losses from prior results that did not materialise). Moreover, with a common equity tier one (CET1) ratio of 18.2%, the bank has twice the amount of capital required by regulators. This really demonstrates the strength of the financial sector. Moreover, at the end of the month, the European Banking Authority (EBA) released the results of its 2021 bank stress test exercise. The stress test scenarios were particularly harsh, but banks performed extremely well. This is in line with what we have seen since the beginning of the Covid-19 crisis. Due to the resilience of the financial sector and prior to the stress tests, the ECB decided to remove the cap on dividend payments for European banks. The Bank of England also decided to remove the cap on dividends for UK banks.
In conclusion, we continue to generate relatively high income, with good visibility thanks to the strong credit quality of our holdings. Valuations remain attractive, and we believe our securities are well-positioned to benefit from the current environment.
