October 2022 Review

Another monthly review, another PM! However, it does appear that the revolving door that is number 10 has stopped spinning for now.

By portfolio advisor Paul Sedgwick

Dear Partner

A better month for stocks and bonds and an eventful month for UK politics, as Liz Truss’s poorly managed desire to stimulate the UK economy by introducing tax breaks, led to her rapid removal from the post. Rishi Sunak’s fast track appointment, along with a reassured start in the post led to a modest rally in sterling and UK Gilt prices. A low rate of unemployment and an underlying resilience in the US consumer helped the US economy expand in the third quarter, on the negative side Purchasing Manager surveys continue to show weakness. The Q3 earnings season is about halfway through, and with a few exceptions, (mainly in the sectors where high valuations and lower growth expectations met, for example Amazon) overall the majority of US companies produced positive earnings and revenue surprises. Despite slower economic growth and higher wage and input costs corporate earnings appear just about in line with expectations. A strong earnings season from the oil majors is helping.

There continues to plenty to shake investor confidence, including concerns around the consequences of Xi Jingping election to a third term in office. Despite a better than expected Q3 GDP report the zero covid policy that China continues to employ remains a drag on the economy. The yen fell sharply as did Chinese stocks on the announcement of Xi’s re-election.

There have been indications that the historic rise in interest rates has started to bring some stress into financial stresses in the global economy. The overriding theme to the month, and the catalyst for a weaker dollar and stronger stock markets was the expectation the Federal Reserve would tone down the hawkish rhetoric at 2nd November rate setting meeting, this was not the case. Although inflation rates remain stubbornly high, it would appear that, in the US at least, there are some signs it has peaked. Henry Hub gas prices, as we now realise, on which so much of the global economy is impacted by, have fallen 60% from their highs and almost 20% in the past month.

Total Return and Total Return Equity Portfolio Review

Looking at companies that have reported earnings in this quarter who are constituents of our portfolio:

SAP delivered better than expected earnings, beating analysts’ expectations for cloud and non-cloud revenues, providing strong guidance. Reckitt’s reported strong results with an increasing top line and a solid EPS, with a positive momentum. Johnson Matthey had a better month after JP Morgan gave the stock a price target of 21.50. Microsoft shares sold off initially on the earnings report, despite largely meeting expectations, as revenues rose by 16% year on year in the quarter. Texas Instruments reported solid Q3 earnings, they met expectations. However, they did issue a weaker guidance for the rest of the year. Initially the stock sold off modestly, but the market was already ahead of the earnings report.

The company has authorised 20 billion dollars of share buybacks on top of a 3% dividend yield. Prudential and Estee Lauder both reacted negatively to the re-election of Xi Jinping. Johnson and Johnson’s earnings were resilient despite the impact the stronger dollar is having as they confirm the spin out next year of their consumer health division. Nestle continues to report robust sales growth across its key product areas. Merck shares performed well in October as the company boosted its outlook as results topped estimates. Sales grew by 14% year on year for the same quarter.

Sanofi likewise reported earnings above analysts’ expectations and similarly to Merck boosted its outlook for 2022. Sanofi has had a difficult time recently on Zantac litigation concerns. Coca Cola also reported a solid quarter. Shell likewise delivered the strong quarter that analysts forecast, with strong cash generation. Our portfolio is a defensive one, and those qualities have helped defend their earnings in a slowing economic environment.

Taking advantage of the recent weakness in gilt prices has had a positive impact on our portfolio last month. For performance figures please see factsheets on the STRATEGIES PAGE

Outlook

Overall, our portfolios increased on the month more than our peers. Towards the end of the month there was a shift in leadership in sectors, as consumer discretionary, industrials and mining all started to outperform as growth lagged. This change in market leadership would suggest an improvement in investor confidence. It was also interesting to see the reaction from the Nasdaq and the S&P 500 to the disappointing headlines from Amazon’s earnings, along with a weak forecast for the Q4. Initially the shares fell 20% on the report but that fall was quickly reversed, and the stock finished the day down modestly. A recovery of this kind would suggest that stock markets may be starting to discount negative news.

Levels of government debt remain a concern around the globe, we saw how UK gilts reacted to a “growth budget” that ran the risk of raising debt levels. Bringing down these debt levels will involve a mix of higher inflation, financial repression, increased taxes, and spending restraint, which in turn would impact growth

On a brighter note, we may be getting close to the peak of the US interest rate cycle and should the markets start to focus on next year, some analysts are starting to suggest the Fed may even start cutting rates towards the end of 2023. We have been encouraged by the robustness of earnings season for our portfolio but are also mindful of the uncertainties that continue to impact the global economy.

Yours sincerely

Cube Capital