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This week started with a bang with the news that UBS had agreed a deal over the weekend to acquire Credit Suisse (CS) for around $3bn. Only two years ago, the market capitalisation for CS was around $34bn.  The deal brings an end to CS’s recent woes where a flurry of regulatory fines, mismanagement and loss of confidence led to assets and deposits rapidly declining. The bank can trace its roots back to 1856 and alongside UBS had been a flagship company for Switzerland.

One of the surprising elements of the deal was that holders of Credit Suisse AT1 bonds have effectively been wiped out, while shareholders were not. CS had issued approximately $17bn of AT1 bonds and rumours are circulating that bondholders are preparing a lawsuit against the Swiss regulator.

Following on from the emergency takeover of CS, all eyes were on central banks this week, who were due to meet and set interest policy. The concerns around the banking sector were not enough to deter central banks from raising interest rates further. The US Fed and UK’s Bank of England both raised rates by 0.25%, but struck a cautionary tone, acknowledging that higher rates are impacting the economy. At this moment central bankers are walking a tightrope, trying to bring down inflation through higher interest rates, while not causing financial instability.

UK inflation data, released on Wednesday, provided an unpleasant surprise, coming in at 10.4%, against an expectation of 9.9%. The uptick in inflation (previous month 10.1%) was driven by food and non-alcoholic drink prices, which rose at the fastest pace in 45 years.

The big winners this week were defensive assets, with government bonds and gold performing strongly. Bonds rallied (yields fell) on the expectation of lower future interest rates. The gold price has passed through $2,000 per oz this week. The precious metal is often viewed as a safe-haven asset and the price of gold does well when real yields fall – something we have witnessed this week.

Equity markets have been mixed this week, with UK and European equities struggling for momentum by the end of the week. It’s pleasing that the inverse correlation between bonds and equities has returned recently, something that was missing in 2022.

It was banks, a strong sector in 2022, that was bearing the brunt of the pain on Friday, a sign that central banks measures to calm markets may not yet be sufficient. Another strong performer in 2022, the energy sector, has also been weak of late; the oil price has fallen on the back of a more uncertain economic outlook which has fed through to underlying share prices.

The strong relative performance of Apple and Microsoft in recent weeks, the two largest companies in the US, has seen their combined weight reach 13.3% of the S&P 500 – the highest level on record. That means for every $100 invested into the S&P 500, $13.30 goes into just two companies. Within the global equity index, Apple now has a bigger weight than the whole of the UK market!

This week may end up being remembered for two major events; the demise of Credit Suisse, and potentially the end of the interest rate hiking cycle, with the real possibility the US Fed (and Bank of England) may well pause, before potentially cutting rates later in 2023.

Andy Triggs, Head of Investments

Risk warning: With investing, your capital is at risk. The value of investments and the income from them can go down as well as up and you may not recover the amount of your initial investment. Certain investments carry a higher degree of risk than others and are, therefore, unsuitable for some investors.

The most discussed topic in markets heading into this week was the collapse of the Silicon Valley bank in the US. Signature bank, a commercial bank specialising in digital assets with $110 billion in assets, was the next casualty as it was closed this week by state regulators, making it the third largest failure in US banking history. The run on the banks has led to over $100 billion in market value being wiped out from US regional banks forcing policymakers to try and restore confidence in the security of the financial system. President Biden pledged emergency funds available for banks and ensured there would be stricter regulation.

US inflation data saw another fall as the inflation rate dropped to 6% (year-on-year) for February and core inflation (excluding food and energy prices) dropped to 5.5% matching expectations. This data point strengthens the consensus that we have seen the peak in inflation and the US Fed interest rate hikes are having their desired effect. Although US Fed Chair Jerome Powell is insistent on staying the course until inflation reaches the 2%, the SVB debacle and vulnerability of the nation’s banking system may change the Fed’s approach. Last week investors were almost certain the Fed would be raising interest rates by another 50bps, however the banking concerns could now lead the Fed to a lower increase, or even pause interest rate hikes.

The demise of Credit Suisse has been a gloomy one to watch as Switzerland’s second largest bank has battled multiple scandals since 2021. These scandals have led to consecutive losses reported and the stock market value has nosedived almost 90% from $91 billion to around $8.8 billion. Switzerland’s central bank has recently lent the bank up to $54 billion in an attempt to shore up liquidity and begin to restore investor confidence. The famous Savoy hotel located in Zurich has also been put up for sale to help raise additional capital.

On Thursday, the European Central bank raised interest rates by 50bps, a strong hike despite the thoughts of investors that policymakers would hold back on rate rises until the turbulence in the banking sector eases. However, ECB president Christine Lagarde has stuck to her fight against inflation stating that “the banking sector is currently in a much stronger position than where it was in 2008”. Also, she has set out a new framing for the ECB’s decision process that will consider financial data as well as economic data in order to gauge the impact higher interest rates were having on the economy. Despite raising interest rates, the market has lowered its expectation on the peak interest rate level in Europe from 4% to 3.25% on the back of this week’s banking issues.

Turning our attention to the UK, on Wednesday the Chancellor Jeremy Hunt delivered the UK Budget. His first bold claim was that the UK would be avoiding a technical recession this year. The budget was certainly meaty with several key measures unveiled; the easing of costly childcare costs, the continuation of the energy price guarantee for the next three months, a freeze on fuel duty, the follow through with the raised corporation tax to 25%, and a pension tax shake up with the aim to ease the UK’s workforce squeeze. Figures for the UK unemployment rate were released on Tuesday at 3.7%, staying the same as the previous month, however job vacancies continue to fall for the eighth month in a row. The UK has been stricken by public sector strikes with workers mainly protesting over pay failing to keep up with the rise in inflationVolatility returned to markets this week, with large swings in both equities and bonds. Sectors such as financials and energy, which had been the star performers in 2022 suffered the most. UK equities fell considerably on Wednesday, with the large-cap index suffering one of its worst days since 2020. Some of the strongest performing funds this week in portfolios were some of the laggards from last year. This strengthens our consistent message on the need for diversification in portfolios. It is impossible to predict the future however, history has shown us that during these uncertain moments opportunities are created for investors with a long-term horizon.

Nathan Amaning, Investment Analyst

Risk warning: With investing, your capital is at risk. The value of investments and the income from them can go down as well as up and you may not recover the amount of your initial investment. Certain investments carry a higher degree of risk than others and are, therefore, unsuitable for some investors.

Our Spring Budget Newsletter breaks down the Chancellor’s recent announcement, outlining what it means for you and helping you to plan for the new tax year – which is almost upon us.

To start this weekly, we cover a brand not commonly spoken about around the market but certainly important to the chocolate lovers. Toblerone bars, owned by Mondelez, is set to lose its iconic Matterhorn from the packaging under Swissness legislation as production has now moved to Slovakia. National symbols are not permitted on products that are produced with less than 80% of raw materials from Switzerland, with the new branding set to feature a signature from the founder, Theodore Tobler.

One of the most anticipated events this week was the commentary of US Fed Chair Jerome Powell on Tuesday. It’s important to remember that commentary from Powell can often be as significant as the actual interest rate moves as it signals to investors the trajectory of future rates. The main takeaways were that interest rates were likely to rise more than expected in a response to strong inflation and economic data, and the Fed are prepared to move in larger strides, possibly returning to raising rates by 50 basis points. The Fed’s base rate is 4.75% following February’s 0.25% rise, but investors are now predicting rates could rise to 5.6% at its peak. The S&P 500 dropped around 1.3% on the day with the 2-year treasury yield rising to 5% for the first time since 2006.

UK Chancellor Jeremy Hunt is also set to speak soon as investors brace for next week’s budget. With a £30bn windfall in the public sector borrowing, Mr Hunt is facing more pressure to relax the harsh stance he took when first entering the job. He is expected to lay out economic growth measures, address Britain’s workforce and announce tax incentives even with corporation tax climbing from 19% to 25% next month. It is possible to assume that Mr Hunt may be unadventurous with this March budget to leave himself and the Conservative party wiggle room, as he eyes the election timetable.

The UK has certainly been hit with a cold snap this week which is adding strain on the country’s power and transport networks. The national grid was forced to use coal reserves on Tuesday but has not been exerted for the extra supply on any other days.

Germany, Europe’s largest economy, makes the weekly again as they have without warning vetoed their European Union deal to effectively ban the sale of new cars with combustion engines from 2035. The EU have bid to cut emissions by 55% by 2030 with car pollution accounting for almost 30% of worldwide pollution. Germany’s automotive industry is approx. 5% of the country’s GDP, with carmakers Mercedes Benz, Volkswagen and BMW employing over 800,000 people. It looks like Germany will now not support the proposal without a clear plan on how synthetic fuels could be used to meet the zero-CO2 target.

US bank Silicon Valley Bank (SVB) saw its share price collapse on Thursday and is down heavily in pre-market trading this morning. The bank has seen a run-on deposits and as such has had to sell bonds for liquidity, locking in heavy losses. The bank has a high reliance on venture capital corporates as clients, who are now being advised to withdraw their deposits which is escalating the problem further. The concerns around SVB’s survival has impacted banking shares in general, with the sector down on Friday morning. HSBC share’s were down around 5% at open.

US Non-Farm Payrolls data, like last month, came in ahead of consensus. The data showed 311,000 jobs had been added to the economy, against an expected increase of 205,000. Wage inflation was 0.2%, lower than last month’s 0.3% and the slowest increase since February 2022.

This was always going to be an eventful week, with key speeches and data releases occurring, and markets have also had to digest the unexpected events unfolding at Silicon Valley Bank. Next week looks equally as busy, with all eyes on the US Fed’s meeting and to what degree they will raise interest rates further.

Nathan Amaning, Investment Analyst

Risk warning: With investing, your capital is at risk. The value of investments and the income from them can go down as well as up and you may not recover the amount of your initial investment. Certain investments carry a higher degree of risk than others and are, therefore, unsuitable for some investors.

The Month In Markets – February 2023

The strong start to the year failed to gain traction in February with most asset classes suffering declines. Strong economic data and surprising inflation led investors to question the latest narrative of a “Goldilocks” investment environment and start to consider a “higher for longer” interest rate environment.

Before we discuss the likely reasons for the market movements in February, it is worth considering investment timeframes, and the perils of being too short term. Writing these monthly pieces is a reminder to me about the difficulties with investing and why it is important to take a long-term perspective. It feels like each month there is a new story for investors to focus on and a change in market direction and leadership. If we were to follow the short-term noise we would continually be buying at recent highs and selling at recent lows. The two very different market conditions in January and February this year are evidence of this in action. Often the world is not as bad, or indeed not as good as the short-term noise suggests, and for those long-term investors, willing to look through the noise, there can be significant long-term rewards. It is always worth remembering the quote from Warren Buffett – “The stock market is a device for transferring money from the impatient to the patient”.

And so, to February. The optimism of January, driven by expectations of falling inflation and a stronger-than-expected economy, made way to a view of inflation re-accelerating and central banks being forced to take interest rates higher, and keep them there for longer. The “Goldilocks” narrative of January was soon replaced with the “higher for longer” narrative for February.

US Inflation data came in at 6.4% (year-on-year). This was ahead of expectations (which were 6.2%) and only slightly lower than the previous month’s 6.5%, indicating the pace of change was slowing. This data challenged the view that inflation was on a clear path lower and called into question whether the US Fed could ease up on their fight against inflation. We witnessed a rise in bond yields (fall in price) as investors priced in higher US interest rates later this year. As was the case last year, higher expected interest rates negatively impacted equities, with some of the bond proxy stocks being hit hardest.

European inflation data, released at the end of the month, confirmed that the battle against inflation may not yet be over. Surprising jumps in both French and Spanish inflation data led investors to price in a higher terminal rate for European interest rates (moving from 3.5% to 4%). Higher interest rates, kryptonite for bonds, led to rising government bond yields (falling prices). The yield on the 10-year German bund hit 2.70%, the highest since 2011. Less than a year ago the same 10-year bund had a negative yield!

During the month of February economic data releases broadly came in ahead of expectations, indicating that the US and global economies were more resilient than expected. Again, this helped to feed the new narrative that the work of central banks may not yet be over, and a period of higher rates for longer may now be upon us. US Non-Farm Payrolls data, one of the most watched data releases, highlighted extreme strength in the labour market. The previous six months had seen a slowing pace in job hiring in the US and this was expected to continue into January. The consensus view was for around 185,000 jobs to be added to the economy. The official number was above 500,000! This strong hiring in January points towards tightness in the labour market, which is likely to continue to put upward pressure on wage inflation.  Here in the UK the labour market also remains tight, while wage inflation has recently been exceeding expectations. After the Bank of England raised interest rates by 0.5% at their previous meeting, they are now expected to carry on further and increase rates by an additional 0.25% at their next meeting (taking rates to 4.25%).

In the previous monthly piece, we commented on some of the drivers of the stronger-than-expected economy and these factors are likely to have continued to support the economy in February. As a reminder, these were plummeting gas prices in Europe and more generally cheaper energy prices globally, and the re-opening of China and rebound in economic activity currently underway in the world’s second largest economy.

The swing in sentiment in February generally led most asset classes lower, in complete contrast to January when almost all assets rose in value. As has been highlighted already the oscillating nature of markets in the short-term can lead one to overtrade and continually chase their tail in search of returns. We think the probability of success, or at least repeated success, is extremely low from taking such short-term views.

We are taking note of the recent data, but as the saying goes, one swallow does not make a summer. Our bigger-picture thinking still leads us to be cautious about the global economic outlook. We are mindful that it will take time for the impact of higher interest rates to feed through to the economy. Remember 12 months ago the US Fed hadn’t even begun to raise interest rates!

With higher expected returns on defensive assets, such as cash and short-dated government bonds, we believe we are being paid to be patient, a scenario we have not really experienced over the previous decade.

Appendix

5-year performance chart

Risk warning: With investing, your capital is at risk. Opinions constitute our judgement as of this date and are subject to change without warning. Past performance is not a reliable indicator of future results. This article is intended for informational purposes only and no action should be taken or refrained from being taken as a consequence without consulting a suitably qualified and regulated person.

Andy Triggs

Head of Investments, Raymond James, Barbican

This week we entered the month of March, named after the God of war, Mars. March was the time of year when soldiers recommenced any war that was interrupted by the winter. March also is the month of a few significant events, St Patricks Day, Ramadan and the change in Daylight saving time.

Continuing with our weekly review rather than a history lesson, UK home owners have had their own battles with house prices. It is important to remember that house prices soared during the pandemic, boosted by ultra-low interest rates, stamp duty tax incentives and greater demand for living space, but we are now seeing a reverse. Average house price growth turned negative over the month of February, with the 1.1% (year-on-year) drop being the first annual decline since the pandemic. In the current climate of high inflation and rising interest rates, home owners that have attempted to sell their property have on average had to shave approximately £14,000 off their asking price. The “cooling” effect on the housing market is likely to continue as potential home buyers will be facing higher mortgage rates as the Bank of England (BoE) are predicted to further raise the base rate by 25bps at the next meeting.

The housing market in the US has been estimated to fall by 4.5% over 2023, this is modestly lower than previously expected despite the prediction that interest rates will continue to rise. The fall is only marginal in comparison to the gains since 2020 – with house prices up a staggering 45%.

Tesla is seemingly in a world of trouble again after their strong start to the year. The share price took a plunge in 2022 due to a plethora of concerns: Mr Musk’s Twitter takeover, halts on production at China factories, and fears on the demand for electric vehicles (EV’s).  However, after a tough 2022, performance has since soared as Tesla has delivered 75% year to date. Their highly anticipated investor day was on Wednesday as Mr Musk and other executives detailed plans to cut manufacturing costs and invest in a new plant in Mexico. The 7% fall in share price on Thursday was triggered by the lack of detail when the top executives were pushed on a timeline for on a new model, expected to be affordable and accessible for households.

European Central Bank (ECB) Chief Economist Phil Lane made major comments this week as he gave some insight into the thoughts of the key policymakers. He maintained that the ECB would not end rate hikes until they were confident inflation was heading towards the 2% target with rates raising by 300bps since July 2022. However, he believes that monetary policy is filtering its way through the economy, with lower oil and gas prices, the easing of bottlenecks and China’s reopening as factors that will help lower inflation. Markets are now expecting rates to continue to increase to 4% by the end of the year.

China’s reopening from their strict zero-Covid policy continues to be positive as manufacturing activity expanded on Wednesday at its fastest pace in over a decade. PMI (purchasing managers index), which is an index of the direction of economic growth in the manufacturing sector, shot up to 52.6 from 50.1 in January. The PMI impressively beat the forecast of 50.5 and is the greatest expansion since April 2012. The news positively impacted Asian equities, feeding into markets as the Nikkei 225 closed 1.56% up on the week and the Hang Sang closed up 0.68%.

The roundup of the weekly is always consistent even if this isn’t always the case with markets. We continue to blend asset classes in portfolios to diversify risk(s) and smooth the overall return profile.

Nathan Amaning, Investment Analyst

Risk warning: With investing, your capital is at risk. The value of investments and the income from them can go down as well as up and you may not recover the amount of your initial investment. Certain investments carry a higher degree of risk than others and are, therefore, unsuitable for some investors.

In this month’s Market Commentary, Raymond James UK European Strategist, Jeremy Batstone-Carr, discusses a new term in the financial lexicon, a change in the market’s tone and why, despite the challenges ahead, there is cause for optimism in the long run.

Today marks a year since Russia invaded Ukraine. From a financial market standpoint, it has been a difficult twelve months with equities and bonds impacted.   Putin seems determined to continue his invasion and even had the US holding their breath this week as he announced Russia would be halting their participation in “New Start”, a nuclear arms treaty. During a state address, Putin looked to support the Russian economy, promising tax breaks for businesses and government support for fighters returning from the war in Ukraine, a further prop-up for the economy that held up considerably well last year, despite the numerous western sanctions.

This week the Chancellor of the Exchequer was handed a timely boost with the UK running an unexpected budget surplus in January. With the budget set to be delivered on the 14th of March, the surplus of £5.42bn ideally gives Mr Hunt some wiggle room to potentially fund short term tax cuts or raise spending. However, he has set a stern tone this week stating that there is no possibility of greater pay for nurses and public sector workers despite the ongoing strikes.

New Rolls Royce CEO, Mr Tufan Erginbilgic’s term has got off to a flying start with the company beating profit forecasts. They are hoping for more consistent performance this year as underperformance in previous years was heavily influenced by the pandemic; grounded aircraft led to a significant collapse in revenue. They have estimated that this year they will return to 80% – 90% of pre-pandemic engine demand.

German inflation has shown little signs of easing as high food and energy prices persist. The year-on-year figure for January was 8.7%, coming in higher than December ‘22. Germany have certainly felt the brunt of the Russia/Ukraine war as households saw a 23.1% energy rise on the year despite significant government relief measures. The high inflation in Europe’s largest economy may influence the European Central Bank’s interest rate setting policy.

Strong early US market performance has begun to unwind as investors mull the US Fed’s next move. Bonds and equities have once again been positively correlated in recent weeks, with equities falling as bond yields rise (prices fall). A series of strong economic data readings have led investors to price in higher interest rates and a delay in a potential ‘Fed pivot’. The S&P 500 is down -2.49% on the week with its greatest fall in 2023 coming on Tuesday at -2% but is still 4.13% up year to date.

We have seen another historic data release this week as Japan inflation hit a 41 year high in January, core inflation rising 4.2% year on year.  The Bank of Japan will soon have a new man in the hot seat, Mr Kazuo Ueda, and he faces a decision on whether to abandon the current ultra-low interest rate policy.  He spoke this week stating the recent acceleration in inflation was driven by rising raw import costs rather than strong demand. Japan’s economy narrowly avoided a technical recession in Q4 of last year but certainly rebounded less than expected as business investment slumped.

As ever we will continue to do the hard work and consider a wide range of asset classes to reduce portfolio volatility and capture investment opportunities. Diversification in asset class, style and management is key in order to navigate the markets. By not losing in the short term, you can win in the long run.

Nathan Amaning, Investment Analyst

Risk warning: With investing, your capital is at risk. The value of investments and the income from them can go down as well as up and you may not recover the amount of your initial investment. Certain investments carry a higher degree of risk than others and are, therefore, unsuitable for some investors.

Early this week many across the world celebrated the day of love, Valentines. Regardless of the current economic environment, the gifts and gestures are still given in abundance, with US consumers spending $26bn on the day alone. That figure is up from $23.9bn last year and marks the second highest year of spending over the last 30 years.

This week has also been jam-packed with data releases. On Wednesday there was a slowdown in UK inflation as annual CPI came in below forecasts at 10.1% and core inflation (excluding food and energy) dropped to 5.8% from the previous 6.3%. The better-than-expected fall in inflation will be a relief to the Bank of England, giving confidence their series of rate hikes are working. The latest release was the second data point proving the peak in inflation may be behind us. As a result, sterling has fallen against the Dollar almost 150 basis points towards the end of the week to $1.19.

The UK market has been on a tear since Q4 ‘22 as the drop in inflation further boosted markets. We’ve seen the FTSE 100 now break 8,000, reaching all-time highs. We’ve previously spoken about record profits from the UK’s large energy firms Shell and BP, and Centrica, the parent company of British Gas, has now also seen sky-high profits of £3.3bn. Campaigners have spoken out on tougher windfall taxes and lower prices on the company as they attempted to install prepayment meters in households.  Last year the CEO of Centrica, Chris O’Shea, waived his £1.1m bonus as he could not accept it “given the hardships faced by our customers”, he has yet to comment if he will do the same this year-round.

Inflation in the US was a similar story as annual inflation rose 6.4%, down only 0.1% from the previous month. Core inflation also dropped 10 basis points to 5.6%, however the move is not as significant as economists predicted. The latest inflation results still have a way to go to reach the US Fed’s target of 2% and investors are almost certain further hikes will take place. The continued strength in the jobs market is another factor the Fed will be monitoring, as wage increases may feed inflationary pressures.

US retail sales have roared back in January, smashing the forecast of 1.8% and delivering 3%. This was the greatest increase in over two years and follows on from two negative months. When analysing the breakdown, motor vehicles purchases led the race at 5.9%. Lower income households are certainly feeling the pinch of elevated interest rates, however banks believe there are still suitable cash buffers and borrowing capacity.

In a never-ending saga, RMT, the union which represent 40,000 workers across 15 train operators has rejected the latest offer from employers. This has again led to more planned strikes over the coming weeks with the next scheduled date in just a month’s time. It is important to state that the union are not only battling for better pay, but greater job security and working conditions.

Every week following data releases, the pendulum swings and investors are left to guess the moves policymakers will make next. We try to stay clear of the short-term noise and ensure that we are not overly exposed to specific outcomes.

Nathan Amaning, Investment Analyst

Risk warning: With investing, your capital is at risk. The value of investments and the income from them can go down as well as up and you may not recover the amount of your initial investment. Certain investments carry a higher degree of risk than others and are, therefore, unsuitable for some investors.

The Month In Markets – January 2023

The first month of 2023 has proved to be an extremely good month for equities and bonds across the globe. Many of last year’s laggards led the market higher, with the US tech-heavy NASDAQ index recording its strongest January since 2001.

It appears there were three main catalysts which spurred markets on in January which we will discuss in this note.

The first is China. The world’s second largest economy very recently emerged from strict COVID-19 lockdown measures. Almost overnight the zero COVID-19 approach was abandoned and the economy was reopened. The general consensus was for the lockdowns to persist well into 2023, however, civil uprisings appeared to force Chinese leaders into cancelling their lockdown measures. Having already witnessed developed markets reopen post COVID-19 there was a clear playbook to follow, and the expectation is that Chinese consumption will pick up dramatically which will be good for the Chinese and overall global economy.

The second catalyst is energy. As we headed into the winter months at the end of 2022 there was genuine concern that Europe would run out of gas, and that European and UK consumers were going to be facing months, and potentially years, of sky-high energy bills. As a result, markets were pricing in a very weak consumer and a recession across the UK and Europe. A combination of good fortune, through a mild winter, and good forward planning, through high levels of gas storage, meant the expected energy crisis never fully materialised. As a result, we’ve seen gas prices fall as demand has been lower than expected. It’s clear that the outlook for these economies is still concerning, however, with equities pricing in so much bad news already we saw a strong rebound in these markets.

The third driver of markets has been inflation. In truth, all the points discussed here are intertwined. China reopening is good for supply chains, which should ease some of the inflationary pressures, while lower energy prices will also lead to inflation falling. During January we received validation of this through US inflation coming in at 6.5%, continuing the recent downtrend. After reaching 9.1% in June 2022, inflation data has continued to come in at lower levels, giving investors’ confidence that we have turned a corner. European and UK inflation also appears to have peaked and fell from recent highs in January. If we have finally turned a corner with regards to inflation, then central banks should be able to be more accommodative in their monetary policy. It was no surprise therefore that sectors such as technology, which really struggled in a higher interest rate environment, rallied as markets priced in interest rate cuts for the end of 2023.

The more positive outlook not only boosted equity markets but also helped the higher (credit) risk areas of fixed income, with high yield bonds performing strongly. Falling inflation helped boost government bonds, while gold rebounded as real yields fell.

While energy, inflation, and China re-opening appeared to act as catalysts, it is also important to consider positioning and valuations. Fund manager surveys towards the end of 2022 highlighted very defensive positioning from managers, with high cash weightings and low allocations to risk assets. The more positive news flow therefore has driven significant flows back into equities this year, supporting prices. Valuations for most regions have also been trading below long-term averages. While valuation metrics are a poor predictor of short-term returns, they are a good explanatory variable for long-term returns. As such asset allocators with a genuine long-term view will have likely increased exposure in January.

The $64,000 question is whether this strong rally in asset prices is a classic bear market rally, or something more persistent. The simple answer is that no one knows, and making such bold calls is a dangerous game.

Our approach at this stage is to be very diversified in our positioning, even more so than usual. We are also trying to avoid the behavioural traps that strong market moves (both up and down) can cause. This is easier said than done but falling back on a process and the experience of our team and investment committee really helps. While some of the near-term noise has been very positive of late, there are still leading indicators (such as the yield curve and housing market) that necessitate us to proceed with caution.

Appendix

5-year performance chart

Risk warning: With investing, your capital is at risk. Opinions constitute our judgement as of this date and are subject to change without warning. Past performance is not a reliable indicator of future results. This article is intended for informational purposes only and no action should be taken or refrained from being taken as a consequence without consulting a suitably qualified and regulated person.

Andy Triggs

Head of Investments, Raymond James, Barbican