November 2022 Review

"This month saw the Total Return Balanced Portfolio step into positive territory for the year"

By Portfolio Advisor Paul Sedgwick

Dear Partner

November ended on a positive note as the S&P 500, for the first time this year, recorded consecutive months of gains. Equity markets are now starting to price in the possibility that the US may avoid a recession next year and, if not, that any downturn will be a mild one. Earnings expectations have been revised downwards as analysts are starting to catch up with the slowdown in the global economy. After the falls this year, stock markets ex US are looking much better value going into next year. Although the Federal Reserve comments continue to paint a hawkish picture, many leading inflationary indicators are starting to point downwards. The US dollar fell last month as the US Consumer Price Index and Producer Prices fell faster than expected. Wage growth in the US should continue to decelerate, energy and agriculture inflation is receding, and pandemic dislocations are fading.

The final Federal Reserve meeting of the year takes place the following week. Consumption remains a positive contributor to US growth and the US surprise index, that compares economic reports against expectations, turned positive in November. Sentiment has improved towards equities, but one gets the sense that many investors are not prepared for a positive outlook as the majority of economists instead continue to focus on the outlook for corporate earnings next year.

Total Return Balanced and Total Return Equity Portfolio Review

This month saw the Total Return Balanced Portfolio step into positive territory for the year. Many of the stocks in our portfolio benefited from the broad rally in equity markets last month, Rio, Prudential and Hermes in particular. All are exposed to Chinese economic activity and the expectation that the zero covid policy that China has enforced in the past is coming to an end helped boost stock prices. Burberry had well received results with half year sales rising 11% and reported a new strategy of focus on “Britishness” under its new chief designer. The forecast sales targets are lifted to £5bn and the £400m share buyback program continues to provide additional returns to shareholders. Covid restrictions easing in China also helped boost the outlook for the group. Estee Lauder likewise benefited from the improving sentiment towards the Chinese economy.

Other stocks that benefited this month include Nestle after they confirmed the company’s ability to pass on costs, and a 21 billion dollar share buyback program as they raised sales guidance. After a weak earnings report, the news that Bob Iger had returned to the CEO role improved sentiment for Disney. Energy fell on the month leading to underperformance in the sector. Shell reported $9.5bn profit in Q3 which was slightly below expectations after the record H1 results. Shell signalled that it is intending to raise its dividend for the full year as well as share buy-backs totalling $10bn in H2. PayPal reported better than expected results at the beginning of the month.

PayPal also announced more collaboration with Apple in processing payments. Analysts were concerned about the company’s slight downward revision of 1% on its revenue guidance for 2022. The downward revision is in the face of industry pressures and a lack of growth in the 432million customers on the service. IMI reported strong results and announced the £118m acquisition of Heatmiser to bolster its products in smart buildings, as well as ongoing restructuring plans.

Outlook

As we look towards the end of the year, the picture does look a better one for 2023 than it has done for most of the year. The S&P 500 has risen around 15% from its lows, but remains roughly 15% down on the year in local currency terms. Aside from the Ukraine/Russia war, the swing factors coming into next year will be Q1 earnings season in early January, Chinese economic recovery, whether the US economy can avoid a recession, as well as the outlook for US interest rates.

As for the UK, we have a limited exposure to stocks primarily exposed to the UK market, should our economy weaken as is forecast. Our portfolio remains well balanced, if slightly defensive in nature. As we always reiterate, periods of uncertainty provide opportunity, and should be welcomed not feared.

Finally, we want to wish you and your family a very Merry Christmas, and all the best for the New Year, and thank you again for your trust and support.

Yours sincerely

Cube Capital