September 2022 Review

The Conservative party ushered in their 4th leader in 6 years only for some members of her own party to threaten to oust her within weeks of her taking up her post, as a result of the highly controversial mini budget

By portfolio advisor Paul Sedgwick

Dear Partner

 

Obviously, September was dominated by the sad passing of the Queen after 70 years of rule. Although all of us will remember the wonderful scenes on the day of the funeral.

 

Another eventful month for both equity and bond holders around the globe, but the focus has been on the UK in the past week, as the new governments tax initiatives to drive growth met resistance. The S&P 500 fell more than 8% in September as bond yields across the globe continue to rise. The dollar strength continues to be a factor, and despite the weaker pound the FTSE 100 lost over 5% in September. The S&P 500 is now down 25% year to date, well and truly back into bear market territory.

 

The Federal Reserve delivered another hawkish meeting, raising expectations as to where US interest rates might peak which added to the volatility. On the plus side, the Citi US economic surprise index, reflecting where economic data comes in against expectations, has risen and remains stable. The latest US employment data continues to show employer demand remains robust, and US consumer confidence picked up towards the end of the month. Commodity prices also fell, including the price of oil, partly in response to a stronger dollar and partly to expectations of weaker economic growth. The war between Russia and the Ukraine continues to dominate headlines, as sanctions not only impact the Russian economy but economies around the globe.

 

The OECD expressed concerns for the outlook for the global economy in their latest outlook piece, as they lowered expectations for growth in most developed economies. While global growth this year was still expected at 3.0%, it is now projected to slow to 2.2% in 2023, revised down from a forecast in June of 2.8%. OECD Secretary-General Mathias Cormann commented that "Monetary policy will need to continue to tighten in most major economies to tame inflation durably," adding that targeted fiscal stimulus from governments was also key to restoring consumer and business confidence. Something our new leader seems to echo.

 

On that subject, the Conservative party ushered in their 4th leader in 6 years only for some members of her own party to threaten to oust her within weeks of her taking up her post, as a result of the highly controversial mini budget. The IMF stepped in with some unhelpful comments at the point of maximum stress forcing the Bank of England to act in the gilt market. Opinions are very much polarised across the press and the wider economic community. Some cheering this reversal of 12 years of tighter fiscal policies and others accusing the government of playing fast and loose with the UK economy. We have long argued the balance between monetary and fiscal policy was wrong and needed to be addressed. A lot will depend in the coming weeks on the relationship between the new Chancellor and the OBR. The OBR deliver their forecasts to the Chancellor on October 7th.

 

Total Return Balanced and Total Return Equity Portfolio Review

 

The portfolios pulled back in September as it suffered from the continued headwinds that equities face at present. The CEO of Reckitt Benckiser announcing his departure had an initial impact on sentiment, however that soon reversed in the following days. Sanofi has endured a difficult few weeks, mainly related to ZANTAC's legal concerns. A note from Morgan Stanley drew attention to the potential liabilities of any ZANTAC litigation. Since reports such as these do undermine sentiment, on the plus side, scientific communities have been extensively studying the consequences of the active ingredient ranitidine in ZANTAC, and no evidence of harm to consumers has been found. So, we stick with it and these times of uncertainty for a historically low volatility stock should provide a further opportunity. Burberry announced the appointment of a new creative director, which was well received by the market. We removed Organon from the portfolio in September, the stock looked optically attractive still, but had failed to deliver to expectations and we felt it a prudent move. At least in the short term this decision has been vindicated as the stock fell over 15% after our exit. We did add modestly to Estee Lauder and Texas instruments.

 

The rising bond yields continue to offer opportunities to add to our positions in gilts. We now own a balance of short-dated gilts, maturing between January 2023 and January 2025, all offering yields of around 4% to redemption, all trading below par, with little in the way of a coupon, as a result all gains will be free of CGT.

 

Outlook

Looking ahead to the year end, at present the Fed is to maintain its hawkish stance as the underlying economic data remains resilient, if weaker than it was, and inflation rates remain elevated. Bonds are now an appealing alternative to equities across many developed markets, particularly those in the UK and the US, adding to pressures on valuations for equities. Stock markets are now more attractively valued, the large cap S&P 500 now trading closer to 12x forward earnings, if one excludes the higher rated FAANG sector. The small cap S&P 600 trading on almost 10x price to earnings, the FTSE 100 now trading likewise around 10x. Valuations can mean little if yields continue to rise, economic uncertainty remains and question marks on the strength of the underlying corporate sector impacts sentiment.

 

Sentiment for global indexes has moved back into deep fear territory, as concerns increase on the impact rising rates are having on the global economy, and institutional structures built on a low interest regime come under pressure. Systemic risks are at levels not seen since the Eurozone crisis of 2012 and back to levels seen in early 2008, and Credit Default Swaps continue to rise for financial institutions. Often at these times Central Banks step in- this is proving harder to do at this point.

 

Positioning is negative amongst portfolio managers who are overweight cash, which may provide support at some point. Global equities are in a bear market as investors prepare for the possibility of an economic recession. Goldman Sachs recently lowered its year end forecast for the S&P 500 to just above where it is trading today, from a target of 4300.

 

On a more positive note the dollar has weakened in the past 10 days, against other major currencies, and this has provided a stronger start to October for equities. Treasury yields have fallen in the past few days, perhaps speculators may be starting to anticipate a more dovish Fed. We remain defensively positioned, the addition of gilts to the portfolio adding some welcome income, the income comes through a tax free capital gain, making them more attractive, as no CGT is applicable to gains in government bonds.

 

Obviously, we see there is a lot of uncertainty currently. These times generally bring opportunity for the long term, but our portfolio management remains prudent as well.

 

For up-to-date portfolio performance please see the factsheets on the strategy page

 

Yours sincerely

 

Cube Capital