What happened through December…
Happy New Year! As we begin 2023, the month of December saw the stock market Grinch crown off a challenging year on the markets with no Santa rally in sight, as investors grappled with concerns for a recession in 2023. This was despite the positive news as inflation data finally came in mostly better than expected, although still elevated. The November inflation prints came in at 10.7% in the UK, down from the previous month’s 11.1%, The US inflation rate was 7.1% against the previous months rate of 7.7%. However, Europe bucked the trend with inflation rising 0.1% from the previous month to 10.1%.
Central Banks were busy through December as they continued to chart a course for further monetary policy tightening, although less aggressive than previous meetings. The December central bank meetings saw the Bank of England, The US Federal Reserve and the European Central Bank all raise rates by 0.5%, bringing interest rates to 4.5% in the US, 3.5% in the UK and 2.5% in the EU. As Central Banks remain focused on price stability, we would expect them to continue to raise rates, although with reduced ferocity as inflation likely continues to calm through 2023 and the potential recession becomes a reality.
Market reaction over the last month…
Over the month of December the FTSE 100 was down 1.60% and up 0.91% over the year-to-date period. In sterling terms, the more technology and growth based US S&P 500 index was down 7.33% over the month and was down 9.77% over the year-to-date period. In Sterling terms, the global FTSE All World Equity Index was down 4.72% through December and down 9.28% over the year-to-date period.
How we have been managing Bespoke portfolios through December…
Through December we have remained cautious on the equity markets as a potential recession looms during the first half of 2023 and earnings expectations are likely cut as tighter monetary policies begin to catch up with ‘Main Street.’ For this reason, we have maintained a higher than usual exposure to cash, including for those clients entering the early stages of portfolio construction, as we believe there will be much improved opportunities to invest into our targeted high-quality companies, including the US growth companies over the coming weeks. This patience has so far paid off as many of these companies have seen their share prices stall in GBP terms. We shall be closely monitoring these companies, looking for improved entry levels for the medium to long term. In the meantime, portfolios remain exposed to the broad US markets through the iShares Core MSCI World ETF, which currently has roughly 70% exposure to the United States.
During December we did move to take advantage of the higher interest rates in the fixed income markets by increasing the existing exposure to gilts, now yielding around 3.3%, as well as topping up the corporate bond exposure yielding roughly 3%, and we have added a new global bond exposure to capture fixed income opportunities around the world with a yield of circa 6.27%.
Current portfolio positioning and the outlook…
We come into 2023 at the middle of our equity allocation range and with some cash on the sidelines that will function as dry powder for anticipated opportunities during the coming months, as markets react to the likely recession unfolding and our expectation for company earnings to contract. Whilst it is impossible to call a bottom in the markets, we remain price target sensitive and will make investments into direct equities when the pricing level presents investors with an excellent entry point for the medium to long term.
What have we been doing for clients in our Hardy Managed Portfolios…
Hardy have increased the bond exposure, buying UK Government Bonds with yields of just over 3% and US Treasuries at 3.5%, and also higher risk corporate bonds with yields of 5-6%. Within equities, Hardy has been slowly increasing the exposure to commodities, which could be at the start of multi-year outperformance, driven by steadily growing demand yet restricted supply.
Overall, while we have this uncertain economic outlook, this blend of growth funds, more defensive funds and a growing number of funds which are paying attractive interest and dividends seems appropriate. This means we’re now receiving an increased level of income while we wait for some of the uncertainty to lift, which we expect as we go through 2023.
Final thoughts…
2022 has proven to be a challenging year for investors as the world has had to contend with heightened geopolitical concerns, inflationary pressures not seen for a generation, and the prospect of a challenging recession. We continue to believe that we will see a return to positivity and a recovery with an economy in better shape than before, and new exciting opportunities to invest into. We have been actively managing portfolios through the course of 2022 and whilst performance has been in negative territory, we believe that our approach has resulted in the downside being minimized as compared to the broad indices and our peers. As long-term investors, we are excited for the opportunities that will come into view over the coming months and years and look forward to more positive times ahead. In the meantime, everyone here at Casterbridge wishes you and your family a very Happy New Year for 2023.
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.
