- Investment Manager
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The third financial quarter (1 July to 30 September 2022) was dominated by rising inflation and further increases in interest rates in the UK and US. The European Central Bank (ECB) has also started to tighten rates to curb inflation across the region. Central Banks continue to try and strike a difficult balance – the need to control inflation and the need to maintain growth in the economy.
In the UK, we experienced turmoil as the initial fiscal plans from the government were announced. Further scrutiny is needed to back up the plans and this will come from the Office of Budget Responsibility. As the dual impact of higher inflation and rising interest rates persists, one area to focus on will be the impact on corporate margins. So far, these margins have been resilient, particularly in the US where the economy doesn’t have the European and UK headwinds. Some downgrades are anticipated in the US as the Q2 earnings season gets underway. This is likely to vary between sectors and between businesses within each sector, although some of this is already priced into markets.
Here in the UK, the Truss Government announced a package of fiscal support which surprised markets given the lack of comments around the longer-term plans to balance the outgoings. The Bank of England stepped in to support the fixed income market and sterling. Market returns were mixed with the MSCI United Kingdom IMI index, which represents some of the larger companies in the UK, down by 4.2% over the quarter. The smaller companies within the UK are still being hit the hardest on price, despite many continuing to produce solid results and continuing to generate strong cash flow, often in niche areas. Interest from overseas investors has picked up as a strong US dollar and low valuations look appealing for some corporate opportunities.
US markets were down over the quarter as increasing interest rates took effect. For now, the jobs market remains strong in addition to wage growth, which both influence core inflation numbers. The central bank in the US (The FED) raised interest rates twice over the quarter, with its messaging remaining clear and concise – a focus on cooling inflation.
In European markets, the energy crisis continues to dominate the headlines, and problems with one of the main pipes have stoked inflation further. As a result, the ECB raised rates for the first time in 11 years by 0.75% to a new rate of 1.5%.
We continue to proactively engage with all our fund managers. Across the fixed income managers we are monitoring positioning in case central banks tighten ahead of the current expectation. Many of our funds are positioned cautiously in companies that continue to have strong cash flows to meet their debt obligations.
We always consider what is driving short term sentiment in the markets against the potential for opportunity longer term
Some of the underlying investments in the funds are assets with inflation linked contractual payments often backed by governments. Our portfolios remain diversified across each asset class, sector and geography, and our approach has the flexibility to take advantage of the changes in the markets throughout this period.
This information is obtained from sources considered reliable, but its accuracy and completeness is not guaranteed by Anderson Strathern Asset Management Limited. Neither the information nor any opinions expressed constitute financial advice. Investments can fluctuate in price, value and/or income and may return less than the original amount invested. Past performance is not necessarily a guide to future performance. Anderson Strathern Asset Management Limited is authorised and regulated by the Financial Conduct Authority.