March 2022 Review

By Paul Sedgwick – Portfolio Advisor

Dear Partner,

March started in the same vein as January and February. Equity markets were already under pressure as the Federal Reserve continued to ramp up its hawkish rhetoric. At the same time, economists were coming to terms with the impact the conflict between Russia and Ukraine will have on the broader economy and, in particular, oil prices, increasing the threat of an economic recession and inflation rates remaining higher for longer.

Sentiment for stocks was hitting rock bottom, the Nasdaq and the German Dax index reached bear market levels, the S&P500 fell into correction territory, defined by a fall of more than 10% from its peak. The FTSE 100 held up slightly better due to its commodity exposure. The CNN fear and greed index hit extreme anxiety, and retail investors’ bearish sentiment hit a one year high. As Warren Buffet always tells us, when others get fearful, we should get greedy. We did not get greedy, but we did maintain our position, and the heavy level of scepticism that had crept into stocks was enough for the start of a recovery. The catalyst was the promise from Chinese authorities to help stimulate the slowing Chinese economy and then helped as oil prices retreated from their peak.

Bond investors have not fared so well this month as yields, particularly in the US, continue to rise, the ten year US treasury hitting 2.5% at one point in March. The FT reported this was the worst start to a year for bond investors on record.

Total Return Balanced and Total Return Equity Portfolios:

We took advantage of the rise in yields to place a little of our cash in two-year gilts. We paid 97.6 pence, maturing in January 2024 at 100. On the broader portfolio, we sold Whitbread. We did take the opportunity to subscribe to the rights issue at 15 pounds; during the covid peak, the shares have recovered substantially from the lows, but we feel this current volatility will offer better opportunities, and we maintain our discipline. Rio and Royal Dutch were amongst our best performers, PayPal recovered some of their recent losses.

We would not be complacent enough to believe that equity markets are out of the woods, but we do think that there are indications some global inflationary pressures are easing. The Federal Reserve has maintained its hawkish stance, but this could change if economies weaken and inflationary pressures ease. The narrowing of the spread between the yields on short and longer-dated government bonds is often considered a warning of an economic recession. We are aware of this.

We hold companies that grow their earnings over time, and that is where our focus lies. Many of our companies have pricing power during periods of rising costs. We want to maintain our flexibility during these times of uncertainty and take advantage of them and not fear them. The portfolio was born out of the 2008 financial crash, performing through several periods of uncertainty. The 2010 Dubai crisis, the 2011 US government debt default concerns, the 2012 threat to the euro, as Mario Draghi famously announced, “we will do all it takes”. The 2013 taper tantrum as the Fed started to withdraw the first of their stimulus measures post the financial crisis. 2015, investors feared a slowdown in Chinese growth, and Greece defaulted on its debt. The 2018 economic slowdown as the Fed shrunk its balance sheet and the 2020 Coronavirus economic shutdown. During that time the total return balanced strategy has compounded a return of 7.6% gross of fees as at year-end 2021 (Past performance is not a guide to future returns and investors may not get back the full amount invested). Economies grow over time, just not in a straight line, and we must remember that.

Yours sincerely,

Cube Capital