EADSY - L1 Capital International Fund June 2024 Quarterly Report

2024-07-11 07:55:00 ET

Summary

• In this quarterly report, we have outlined our assessment of the current investment environment and the implications of very ‘narrow’ equity markets, where a few companies are driving index returns.
• We do a review of the last quarter, including key contributors and detractors to the Fund’s performance, recent portfolio adjustments, including new additions to the fund.
• We've also included a detailed overview of AerCap, the largest aircraft leasing business in the world.

Current investment environment

"The important question for the investor is not whether conditions are good or bad (if, in fact, they can be measured on such a scale), but whether they are changing for the better or the worse relative to expectations." - Arthur Zeikel

Macroeconomic conditions

Macroeconomic data has been mixed over the past three months. In the U.S., inflation remains too high, and the labour market remains too strong, for the Federal Reserve to cut interest rates. Market expectations for cuts in the Federal Funds Rate continue to push out. According to the CME FedWatch, the market is pricing in a more than 96% probability that interest rates will be left on hold by the Federal Reserve in July 2024, with an initial cut of 25 basis points in September 2024 being the 70% favourite. In our view, other than for the importance of the signalling affect for potential future monetary policy changes, whether the Fed cuts rates once, twice, or even doesn't cut during 2024 is not important in isolation and needs to be considered in the context of other macroeconomic data. We continue to expect interest rates to broadly remain 'higher for longer', a view that is increasingly becoming consensus.

Figure 1: Core U.S. PCE growth by category

Figure 2: Federal Reserve Funds Rate and expectations

The quote from Arthur Zeikel at the start of this quarter's report is insightful on many levels. The part in the brackets, namely the difficulty in measuring economic conditions on a macro scale, is not lost on us. The data is so mixed currently that it is possible to find evidence to support both bearish and bullish prognoses. Let's drill one level down on the two key variables that the Fed (and all central banks) focus on - inflation and labour market conditions....

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