What’s happened in markets?

FTSE All Share 2.17 -0.68 2.77 16.48 15.50 7.85 5.63
Euro Stoxx 50 2.92 -3.34 1.16 21.23 22.29 15.01 8.97
S&P 500 3.84 1.54 6.04 27.14 30.28 23.46 17.96
Japan Topix 0.90 -1.61 -4.76 11.66 13.60 10.06 7.71
MSCI Asia Pac. 1.25 -2.12 -5.21 -3.89 -0.46 12.75 11.10
MSCI Emerg. Mkts. 1.15 -2.69 -4.94 -2.07 1.09 11.62 9.97
Jo’burg All Shares 1.29 5.16 12.81 25.70 26.03 16.44 10.73
UK Gov’t Bonds 0.43 2.80 2.10 -1.86 -1.73 3.72 3.53
US Gov’t Bonds -0.97 0.10 -0.84 -2.38 -2.32 4.45 3.13
Global Corp. Bonds -0.51 -0.18 -0.84 -0.75 -0.26 6.74 5.01
Emerg. Mkt. Local 0.89 -1.36 -4.58 -7.95 -7.14 3.39 3.56

Figures in the respective local currencies as at the end of trading on 10/12/2021.

Global markets remained volatile as news on the Omicron variant developed. From an economic standpoint, the gross domestic product figures coming through from the UK showed the economy grew by a weaker than expected 0.1% in October, hit by ongoing supply chain disruption and a fall in activity such as dining out.

In the US, inflation rose to an annual rate of 6.8% in November, hitting a 40-year high. This followed Federal Reserve Chair Jerome Powell’s suggestion, on Tuesday 30 November, that the word “transitory” is no longer the most accurate way to describe the current high inflation rate.

The uncertainty in markets was fuelled further by an escalation of tensions with Russia, as US President Joe Biden warned Russian President Vladimir Putin that the West will target Russian gas exports and deploy more troops to eastern Europe if he orders an invasion of Ukraine.

On the corporate front, Chinese real estate developer Evergrande, which had slipped out of the news of late, was labelled a defaulter for the first time, having failed to make a crucial payment of US$83m to its bondholders.

The news flow around the Omicron variant remained the key driver of market movement over the week of 6 December. Early studies showing Omicron is four times more transmissible than the Delta variant led to a tightening of restrictions around the UK and Europe.  The UK government moved to Plan B, recommending people work from home, where they can, and wear face masks on public transport and in public indoor settings. On a more positive note, Pfizer said three vaccine doses can offer protection against Omicron, prompting a big push on vaccination and booster programmes across the UK and Europe.

In terms of markets, the pendulum continued to swing back and forth, but we saw some strength return in the week of 6 December as investors’ concerns around the Omicron variant started to ease a little. This was primarily down to the potential good news around the lower severity of Omicron, rather than its higher transmissibility.

Cyclicals struggled, with emerging markets (-2.7%) and value (-1.0%) being the relative underperformers, and small capitalisation stocks (-5.0%) seeing a hefty decline over the last 30 days.

Oil prices were down (-10.5%) over the last 30 days, due to the threat of Omicron and whether it would lead to further lockdowns and slow the economic reopening.

The flight to safety from riskier assets was supportive of government bonds (+0.43%) and also benefited safe haven currencies – such as the US dollar and Japanese yen.

Latest Consensus Forecast
UK GDP (QoQ) 1.3
UK PMI 57.6 56.4
UK CPI (YoY) 4.2 4.8
EU GDP (QoQ) 2.2
EU PMI 55.4
EU CPI (YoY) 4.9 4.9
US GDP (QoQ) 2.1 2.1
US PMI 69.1
US CPI (YoY) 6.8

What’s happened in portfolios?

In terms of our portfolio positioning, there were no significant shifts. The recent uncertainty has caused markets to be very volatile, reversing every other day, which has really highlighted the importance of having a balanced approach in equities.

We view the current threat from Omicron as more of an opportunity within portfolios, but markets are reading it in a very similar way so we’ve seen strength build over the week of 6 December, with many parts of the market back to pre-Omicron levels.

We are watching areas such as value and cyclicals, in particular, and looking for opportunities to make a slight rebalance within portfolios. However, our core positioning remains intact, with a slight overweight to equities as the current environment is supportive of riskier assets. Over the month of November, our growth quality managers were helped by their overweight to large capitalisation, defensive stocks such as consumer staples and IT. While more recently, in the week of 6 December, we have seen a bit of a rotation with our value-oriented managers doing well on the back of their overweight to financials and energy.

We remain underweight to fixed income and the current environment continues to be supportive of credit rather than duration risk, which hasn’t helped portfolios since the start of December, but we do expect that to play through. The better quality stance of our short dated high yield managers continue to outperform and our bias to this area has worked well for us, as yields have moved higher and been a tailwind to performance.

Our particular focus remains in areas such as real assets and alternative strategies where we can build in a degree of inflation protection to the positioning of client portfolios.

Our alternative strategies also offer diversification benefits, which were perfectly demonstrated during November by our song royalty managers, Hipgnosis Songs Fund and Round Hill Music Royalty Fund. While markets were down, they managed to give a positive return and it’s very pleasing to see they are still in positive territory in December. Their cashflows tend to be uncorrelated to the mainstream asset classes and relatively immune to the cycle of good times and bad. An increased uptake in streaming services has also provided good tailwinds in the area.

In terms of inflation protection, they are continually nurturing new sources of revenue from their existing catalogue – through song promotion via social media and advertising, and more efficient royalty collection. Both of our holdings offer a stable, secure revenue stream and an attractive yield of around 4% to 5% off the back of a catalogue of strong evergreen song rights that have stood the test of time. And include one of the most successful Christmas songs of all time – All I Want For Christmas Is You.

What’s happening this week?

15 Dec • US Fed Interest Rate Decision | 15 Dec • UK Consumer Price Index (November) | 16 Dec • EU, UK & US Flash PMIs (December)