Otso Monthly - June 2025

Performance

The market continued its positive momentum from June. The market was broadly optimistic due to continued relief from trade uncertainty and progress towards the passage of the “Big Beautiful Bill”. This helped to offset geopolitical tensions and concerns about stubborn inflation, and a slightly Hawkish Fed.

Both the market and Otso Capital performed positively in June. The benchmark return was approximately 5.1% in USD terms (3.3% in AUD terms). Otso Capital delivered 5.8% in USD terms (3.95% in AUD terms) net of fees, delivering a modest out performance.

June Performance. Figures are preliminary.

What happened in June?

The S&P500 did well in June. The index consistently increased, reflecting relatively broad based optimism. Throughout June, the 10 year treasury yield decreased modestly from 4.45% to 4.28%. The 1 year treasurer yield also fell modestly from 4.13% to 4%. This underscored broader market positivity.

S&P500 in June

Several broad themes emerged in June.

1. Trade and tariffs: June was relatively quiet in relation to trade and tariff news. The lack of news helped to boost markets by reducing volatility. However, towards the end of June, commentary and analysis suggested some caution about the looming July 9 tariff deadline.

2. Tensions rose and then cooled in the Middle East: June featured escalated tensions between Israel and Iran, including some fears that this could influence oil prices and shipping. However, the US involvement appeared to ‘escalate to deescalate’, resulting in middle east tension remaining relatively contained.

3. Optimism about the tax bill: June featured much talk of President Trump’s “Big Beautiful Bill”, which subsequently became law on 4 July 2025. The main features were an extension of the 2017 tax cuts and modest spending cuts. While some economists had warned that extending the tax cuts could exacerbate the deficit, both fixed income and equity markets were less concerned. Indeed, investors appeared to agree with Treasury Secretary Scott Bessent’s argument that failing to pass the bill (and thus, hiking taxes) would undermine growth, by undermining capital formation, capital utilization, and incentives.

4. Potential for a rate cut: Fed Chair Jerome Powell remained cautious about a rate cut. Core PCE inflation remains above 2.5% (relative to a target of 2%). Furthermore, the employment situation is relatively stable. The Fed’s June Summary of Economic Projections showed officials raising their full-year inflation forecast to about 3.0% (up from 2.7%) and trimming their 2025 GDP growth forecast to ~1.4%, reflecting concerns that new tariffs could slow the economy while pushing prices higher. Fed Chair Jerome Powell struck a cautious tone: he warned that import tariffs could start driving goods prices up over the summer, a remark that prompted a brief jump in Treasury yields and caused the S&P 500 to surrender its earlier gains on the day of the announcement. Overall, the Fed’s message was viewed as slightly hawkish – officials appeared “laser-focused” on containing inflation and signaled willingness to tolerate some weakness in growth to achieve that goal.

Otso modestly outperformed the S&P500 (proxied by the SPY ETF) net of fees in June. We adopted a relatively cautious approach in June, especially heading into July. This is because while we believe that the US stock market is resilient, the July tariff deadline has the potential to introduce significant volatility. Nevertheless, the fund benefited from our derivative overlay strategy. Stronger performers included some exposure to small caps, including related derivative overlays. A weaker performer included an exposure to VIX in the latter part of June, again via derivative overlays on a VIX ETF. We entered the relevant ETF (UVXY) at $20 (i.e., via cash secured puts). It had fallen precipitously from its highs during the Iran/Israel/US tensions. The logic behind the exposure was heightened tensions in the middle east and the looming tariff deadline. We entered this position as a quasi-hedge against trade, and geopolitical, tension.

Looking forward

July promises to be an ‘interesting’ month for markets. At the time of writing, the US has passed the Big Beautiful Bill. We regard the Bill as positive for markets and for the US economy. If the Bill did not pass, corporate taxes and higher-income taxes would increase significantly, undermining growth and capital formation. It would also render the US less attractive to myriad other countries: indeed, Vietnam – oft in the news for trade reasons – has a corporate tax rate of 20%. The US smartly realized that human, and financial, capital is mobile and acted accordingly.

The tariff negotiations in July will add volatility. At the time of writing, the US has announced a tariff deal with Vietnam, reflecting a 20% tariff. It has also imposed 25% tariffs on South Korea and Japan, which President Trump has noted is a recalcitrant negotiating partner. Given that the latter tariffs are similar to those imposed on 2 April “Liberation Day”, this suggests, that countries that fail to make sufficient progress could face significant tariffs, which in turn could weigh on markets.

We remain positive about the US equity market. We do not believe that Europe is more attractive than the US. From a technical standpoint, the fund focuses on the US. But, that aside, Europe’s fiscal settings are manifestly inadequate to spur innovation: Europe’s corporate, capital, and personal taxes are far too high to attract human and financial capital. It will not overtake the US for long term growth or innovation. Thus, we regard the debate between the US and Europe as being one of short term valuation differences (as opposed to long term growth differences). Our view could change should the US start implementing European-style policies, in which case we would adjust-down our US growth views.

S&P500 analyst consensus forecast as at 8 July 2025. Source: Factset.

Additionally, we see positive sentiment in US markets and this is in alignment with analyst consensus, which broadly forecasts the S&P500 to increase over the next 12 months, albeit at a tepid rate.