- Investment Manager
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Over the fourth quarter, which took us to 31 December 2022, inflation remained elevated and further interest rate increases occurred in the UK, US and Europe. As we enter the new year, investors will be hoping for greater stability with an eye remaining focused on inflation and central bank policy. The combination of rate increases should allow inflation to retreat across the year.
In the UK, we had a period of stability as another new government took office and reversed many of the plans set out by the previous residents of Downing Street. The current Chancellor, Jeremy Hunt, delivered a more fiscally responsible budget which was subject to oversight by the Office for Budget Responsibility (OBR) and welcomed by the markets.
Within the UK there was another changing of the guards as Rishi Sunak took over as Prime Minster. The markets demonstrated unease as government lending costs increased significantly and sterling fell following the previous actions from Kwasi Kwarteng and Liz Truss.
Following the unprecedented action of the Bank of England stepping in to buy some of the government bonds helped provide stability to the markets. Further, Jeremy Hunt delivered a more fully costed budget effectively reversing the original plans, which again helped ease concerns on the unfunded nature of the previous proposals.
The UK market rose over the quarter with the MSCI UK IMI rising 8.80% over the same period. 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 – a strong US dollar and low valuations look appealing for some corporate opportunities.
US markets rose in Q4 as investors balanced ongoing caution from the FED. There were indications that the policy tightening pace would slow and signs that inflation is cooling. Corporate earnings levels continue to grow on the whole, albeit at a slower rate than in previous years. We continue engage with fund to see how the underlying companies are able to and how this is affecting the companies’ earnings. An example of this would be say a paper manufacturer sees the price of the materials go up say 10% is the company able to pass this straight on by increasing the paper cost by 10%.
Across Europe the ECB raised rates to 2.5%. Again, this is aimed at trying to drive down inflation as consumer demand cools given increases in rent and mortgage rates aa a result. Despite this markets were strong in Q4 with gains coming from the more economically sensitive areas such as energy, financial services, industrial sectors and consumer discretionary sectors including leisure and non-essential goods. Returns were driven on hopes that inflation may have started to peak, meaning the speed and level of rate rises may not be as high as first forecast and the squeeze on household income may start to ease a little. In December, the ECB raised rates by 0.5% and the ECB President, Christine Lagarde, warned that further rate rises are likely to bring inflation back to target.
We continue to proactively engage with all our fund managers. Among our fixed income managers, we continuously monitor our positioning in case central banks raise rates higher and/or faster than the markets’ current expectations. Many of our funds are positioned cautiously in companies that continue to have strong cash flows to meet their debt obligations.
When reviewing where to house our clients’ funds, we always consider what is driving short term sentiment in the markets against the potential for longer term opportunities. We currently favour equities with a preference for active managers. We’ve seen our underlying managers’ activity pick up with many reducing and adding to exposure of companies they hold as opportunities arise. We continue to focus on fundamentals of price, earnings and dividends as the drivers of returns over investment time frames.
We also favour a pool of diversified real asset funds. 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.