Key Points
Last 12 months – It was a game of two halves, we defended the capital by holding cash into the low of October 2022, the last six months have seen a mini-banking crisis, followed by an AI driven rise in prices in the large US tech stocks.
Recent Activity Buys – Where appropriate recent buys include- Microsoft, Polar Cap Technology, T-Mobile, Coca-Cola, AstraZeneca, Sanofi, Vanguard US Treasuries, JPM Emerging Markets Income.
Sells – MSCI All World ETF, RWC Emerging Markets, Activision Blizzard.
Outlook – Markets have priced in a Goldilocks scenario in terms of a soft landing, but we need to be vigilant of surprise inflation shocks and credit events with reducing central bank liquidity.
Last 12 Months
The markets have been a game of two halves, with sentiment changing drastically after we hit the October low in 2022. The prospect of higher inflation and subsequently higher rates prompted the market to swiftly react to higher costs of capital, debt servicing and future earnings potential. There was a mini-banking crisis in a small selection of poorly capitalised banks who struggled from a swift exit of depositors who looked to money-market funds to park their capital at higher rates.
We had been at elevated cash levels throughout this period to reflect our nervousness as this being a contagion to the wider market. But the official release of Chat GPT from Open AI became a surprise catalyst to a previously faltering market, with a small concentration of stocks becoming largely responsible for market performance. Coined the ‘magnificent 7’, these stocks make up roughly 30% of the S&P 500 and accounted for 73% of the indices performance in H1. We had been gradually adding to tech, taking account of valuation, having held Microsoft, Service Now and Polar Capital Technology in the period.
As inflation has abated through the Base Effect (YoY inflation vs a larger number leads to lower inflation rate) and energy costs falling dramatically from their 2022 peak. This means central banks have had a more dovish tone despite still raising interest rates, with less rises now being priced in. The ‘Goldilocks’ scenario of a soft landing does now seem feasible, but possibly not unilaterally across all markets.
Recent Activity
We have been adding to areas on valuation grounds, being vigilant of the macro environment, with two additions in the US with Coca-Cola and T-Mobile. Both we picked up after a period of weakness but offer strong global brands and healthy balance sheets. We also topped up our underweight to US Treasuries as we feel the rate hiking cycle is approaching its peak and the yields offer an attractive return, as well as providing protection if equity markets do have a sharper pullback. We’ve also picked up AstraZeneca and Sanofi, which are a best-in-class Pharmaceutical companies, who are the leaders in disease prevention and treatment drugs.
Where appropriate in portfolios we have been gardening portfolios, topping up areas like Ocado, Just Eat, Babcock particularly in the UK. We’ve also been adding to our technology positions by increasing the weight of Polar Capital Technology, adding Microsoft and ServiceNow, which have all benefited from the AI-rally. We had been filling holes and this may not have been across all portfolios, depending on the original holding weight.
We’ve done a switch of one our EM funds, the RWC Emerging Markets fund, which we have substituted for the JPM Emerging Markets income fund. We want to bolster the yields on portfolios and previously our Emerging Market equities didn’t contribute towards this. In the short term, the RWC fund had a high exposure to China of 42% and we felt given the short-term turbulence China is facing, it was a good time to switch to improve the yields on portfolios.
We have sold fully out of our Activision Blizzard position after patiently waiting for news on the Microsoft merger. The UK CMA had finally green-lighted the deal their end after changes to the future of Call of Duty had been ironed out to avoid anti-competition issues. This brought the share price up to $90, just $5 below the bid price from Microsoft, and with GBP strengthening before the completion of the deal we were happy to take the profits here to avoid any currency degradation or risk of last minute issues with the takeover.
We’ve also sold out of the MSCI All World ETF we had held since the migration across to Asura. It had reached a 2 year high and had performed its job in portfolios taking the place of some of the international stocks we feel too expensive to add to portfolios at this point. The mega-cap stocks have begun to lose momentum, with the market breadth increasing to mid and small cap companies, we felt it was a good time to exit. So there will be a temporarily higher cash weighting on portfolios, but we will look to feed this back into direct international equities in the coming weeks.
Outlook
With the end of the hiking cycle generally believed to be in the coming months and any talk of recession at least being kicked down the road again, markets have enjoyed a period of better news. However, there are still unknowns and potential risks on the horizon and with economic policy lag of 9-12 months, we’re still yet to see the full effect of higher rates.
There’s also initial evidence in the commodity markets that price, after a period of cooling, are starting to tick back up. Any potential shock rises in inflation will definitely disturb the current narrative and give markets a reason to pause. Any pullback in the markets will allow us to enter, particularly the large US Technology companies, at much better valuations. We have built up our Bond and Alternative allocations to be able to add downside protection and diversification of returns in volatile periods. We still remain committed to moving towards our Strategic weights across our asset classes, taking advantage of individual price movements. We have taken a momentary pause to sell out of the MSCI All World ETF, but we are actively building trades to pick up this weight in direct international equities. We want to be globally invested in quality companies with healthy balance sheets and well-covered income to help navigate portfolios through all macro conditions.
Important Information
This article is for information only and does not constitute advice or recommendation and you should not make any investment decisions based on it. The views and opinions of this article are those of Casterbridge at the time of writing and may change without notice. Any opinions should not be viewed as indicating any guarantee of return from investments managed by Casterbridge nor as advice of any nature. It is important to remember that past performance and the value of an investment, and any income from it, may go down as well as up and the investor may not get back the original amount invested.
