What’s happened in markets?

FTSE All Share3.342.4610.653.342.893.323.44
Euro Stoxx 506.012.2417.726.01-3.695.345.50
S&P 5001.47-1.044.461.47-15.707.989.15
Japan Topix-0.84-3.66-2.26-0.84-3.545.892.35
MSCI Asia Pac.3.652.1611.383.65-15.540.00-0.38
MSCI Emerg. Mkts.3.391.748.993.39-16.21-1.27-1.15
Jo’burg All Shares5.233.2217.275.238.7314.779.15
UK Gov’t Bonds1.02-3.466.311.02-21.62-7.83-3.14
US Gov’t Bonds1.670.192.451.67-9.76-2.260.32
Global Corp. Bonds1.71-0.234.351.71-11.61-2.240.93
Emerg. Mkt. Local1.192.528.881.19-8.30-4.39-1.52
Figures in the respective local currencies as at the end of trading on 6/1/2023.

There has not been a lot to report in markets over the last few weeks given subdued trading volumes over the holiday period.

On the economic front, the US job market remains resilient with the number of job openings coming in higher than expected at 10.46 million. Moreover, the job growth in the US also came in above expectations, with US nonfarm payrolls up 223,000 in December (against 200,000 expected), putting the unemployment rate at 3.5%. However, this was accompanied by cooling wage growth which came in slightly lower than expected at 4.6% year on year, its lowest level since September 2021. We also saw economic activity in the services sector contract in December after 30 consecutive months of growth. The Institute for Supply Management’s index of services sector activity dropped from 56.5 in November to 49.6 in December, as new orders slowed.

Minutes from the Federal Reserve (Fed) showed there are concerns about financial conditions loosening too much. The Fed speakers of late have echoed this rhetoric by stating that the Fed will keep rates restrictive for as long as it takes to quell inflation, with no rate cuts expected in 2023.

In the UK, the property market was in the news as mortgage approvals in November fell to their lowest level in more than two years. The combination of the increased cost of borrowing and persistently high inflation continued to put a strain on household expenditure.

In Europe, warmer than normal weather helped preserve European gas stocks and the cost of natural gas fell to levels not seen since Russia invaded Ukraine. This decline in energy prices led to a fall in eurozone inflation, which came in at 9.2% year on year in December. However, comments from the European Central Bank indicated that interest rates would need to rise further and potentially for longer to ensure inflation is brought under control.

On the corporate front, Amazon announced it is planning on cut 18,000 jobs in order to reduce costs. The cuts amount to around 6% of its corporate workforce.

In other news, Vladimir Putin ordered a 36-hour ceasefire in Ukraine to mark the Russian Orthodox Christmas, but Ukraine was sceptical and requested that Russian troops retreat from occupied territory.

With little to report in markets over the last few weeks, we have taken the opportunity to review what has happened over the last 12 months. In terms of market returns, 2022 was a particularly horrible year with both risk assets and more traditional defensive assets (such as government bonds) being negatively impacted by the prevailing climate of high inflation, falling growth rates and rising interest rates. There was little to differentiate performance between developed markets (-15%) and emerging markets (-16%) over the year. In terms of equity style, value (-5%) significantly outperformed growth (-25%). While energy (+25%) was the only sector to generate a positive return over the last 12 months. There was no place to hide within ‘safe-haven’ fixed income markets, as the concerns over higher central bank interest rates and inflation meant both global government bonds (-10%) and global investment grade credit (-12.3%) fell sharply over the year. Commodities were really the only bright spot in terms of returns last year, in particular crude oil and agricultural prices on the back of supply concerns because of the Russia / Ukraine war.

Reflecting its safe haven status, the US dollar continued to appreciate strongly against most other currencies over the year.

 LatestConsensus Forecast
UK GDP (QoQ)-0.3
UK PMI49.0
UK CPI (YoY)10.7
EU GDP (QoQ)0.3
EU PMI49.3
EU CPI (YoY)9.2
US GDP (QoQ)3.2
US PMI49.6
US CPI (YoY)7.16.5

What’s happened in portfolios?

In equities, our recent tilt towards more quality oriented equities such as Fundsmith Equity Fund and Morgan Stanley Global Brands was helpful during December and the fourth quarter, giving some protection within the current recessionary environment. Over the year as a whole though it was value stocks that dominated. Dodge & Cox Global Stock Fund was easily the best performing fund on a relative basis over the year, given its exposure to value stocks including energy.

In terms of fixed income, as bond yields fell in the final quarter of the year on the expectation of a US Federal Reserve pivot, our longer duration funds outperformed those with shorter duration. However, the opposite was true over 2022 as a whole. We have continued to add to duration over the year while yields were rising.

Real assets and in particular renewable energy infrastructure was the best performing part of the portfolio with Greencoat Renewables (+13.4%), Greencoat UK Wind (+13.5%), and JLEN Environmental Assets Group (+21.1%) – all benefiting from higher energy and electricity prices and inflation. Although it proved a more challenging year for real estate investment trusts (REITs) and commercial property.

Our alternative strategies also gave mixed results as the longer duration assets such as our  music royalty holdings, which have very long and stable cashflows, were negatively impacted by higher interest rates. Our private equity fund Oakley Capital Investments performed well due to the growth of its underlying portfolio of companies, but Princess Private Equity lagged.

What’s happening this week?

12 January • US Consumer Price Index | 13 January • EU Industrial Production | 13 January • UK Gross Domestic Product