2023 Q1 Market Update

SSFS Q1 Investment Update

General Market Overview

As explained in greater depth in our ‘SSFS Q1 Market Commentary’, we are currently experiencing market turbulence in the global economies’ reaction to rising inflation and the knock-on effect this has on the growth-value market bias. The volatile and unpredictable nature of the market has led fund managers of well diversified investment funds and portfolios, to prioritised ‘dampening’ any volatility as opposed to solely focusing on outperformance.  As such, there have been periods of underperformance in comparison to the major indices (this is shown in performance figures below). The aim of this update is to inform you of how each of our investment strategies have reacted the way they have in response to market stimuli.

On-panel performance outliers

For this analysis of our investment strategies, we will be comparing them based on a medium risk profile of ‘Balanced’. Thus, investments mandated to a different risk profile will perform differently to that of their balanced portfolios below. Majority of our strategies have performed similarly; however, our Investment Committee want to highlight the outliers which have performed differently and the reasons why they have performed in contrast to the rest.

Vanguard – Overperformance

Naturally, the LifeStrategy funds have a higher proportion of its assets invested in equities due to their 60%/40% styled and growth heavy portfolios. Whereas other funds may have reduced their equity content to promote stability and diversification, Vanguard LifeStrategy funds will typically hold a fixed percentage in equities (60% for this risk range), consequently outperforming its peers with Q1 performance of 3.64%, almost 1% greater this quarter than the closest fund on our panel.

Hardy – Underperformance

Given the market tilt from value to growth, Casterbridge’s Hardy portfolios have taken a step back in performance given their inherent value bias despite their relative outperformance over the last 12-18 months. Julian Menges, Head of the Hardy portfolios, still remains confident that value stocks are more attractively priced than growth and will outperform over the longer term, regardless of the short periods of underperformance.

Premier Miton – Underperformance

Similarly, to the Hardy portfolios, the diversified growth range from Premier Miton have taken an overweight position in value, contributing to their outperformance over the last 2-3 years. The diversified growth range has continued to hold lower levels of equities, which have performed strongly since the start of the year. Additionally, Premier Miton have underweighted large market capitalisation stocks, such as Amazon, in favour of smaller companies, which has also played out of their favour. Lastly, they have taken a shorter duration stance on their bond allocation, which has slumped ever since bond yield began falling at the start of March.

SSFS Q1 Market Commentary

General Market Overview

Growth rotation

Despite the unforeseen banking instability regarding the Silicon Valley Bank (SVB), there has been a shift in recent performance as the interest rate sensitive ‘growth’ stocks out rallied their ‘value’ counterparts. Investor confidence in the market has grown as the US Consumer Price Index (CPI) has steadily fallen from its 9.1% peak in June 2022 to 5% as of March 2023. This figure was lower than the anticipated Q1 inflation rate of 5.2%, thus, sparking confidence in a smooth decline as future inflation expectations dampen the concern of entering a major recession in developed markets. As such, the likes of Amazon, Apple and Nvidia have had a strong start to 2023, all reporting surges in earnings as individuals regained faith in the wider economy ahead.

US, UK and Eurozone Interest rate watch

In response to rising inflation, standard monetary procedure saw an increase in interest rates to provide the incentive to save money and reduce expenditure, helping cool down an ‘overheating’ economy. In response, the US initially increased rates to combat inflation and they are reaping the rewards as their inflation rate has fallen significantly in comparison to its UK and Eurozone affiliates. Despite these trends, the US has increased their rates twice in Q1 rising from 4.50% to 5.00%, in the bid to further dissipate inflation.

Likewise, the UK Monetary Policy Committee (MPC) have increased their interest rates from 3.50% to 4.25% over the same period despite CPI remaining in double digits at 10.1% (down from 10.4% in February 2023 and from a recent peak of 11.1% in October 2022 (ONS, 2023)). Lastly, the Eurozone has dramatically responded to the inflationary pressures by hiking rates by 50 basis points in both February and March to a current interest rate 3.50%. Due to their headwind in rate rises, this appears to have had a positive effect on Eurozone inflation which started the year at 8.60% and has subsequently fallen to 6.90%.

Bond market volatility

The first quarter for 2023 has been a rollercoaster of emotions for the bond market. With heavy swings in hope and fear, as there is ongoing concern that the financial wide stimulus has caused a commotion. We started the year with a positive January as China announced the reopening of their heavily policed Covid restrictions, thus the outlook for the year was strong. However, this was met with interest rate hikes across the developed world in February causing yields to rise, but at a cost to the bond prices falling sharply. As we headed into March, the SVB and Credit Suisse chaos commenced shifting US two-year treasuries from circa 4% in January, to 5% in February, to 3.5% in March (Financial Times, 2023). Therefore, the bond market and value of stocks have been unpredictable to say the least as, for example, banking shares, Coca-Cola and T-Mobile have had an unprecedented start to 2023.

Strategic Solutions Financial Services’ Views

The start of the year has displayed the unusual effects of a market rotation and showing signs of future uncertainty. We have witnessed a rotation from Value to Growth and continuous interest rate rises causing instability across markets. Despite this, as we look back to how inflation has been controlled, only the US and Eurozone have dramatically increased interest rates in response to inflation. However, the proof is in the pudding as inflationary pressures in the US and Eurozone are dissolving, whereas the UK inflation rate is still lingering, due to the UK steadily increased rates in the hope of a ‘smoother’ landing. However, the risk remains as the uncertainty over what the UK will do to respond to its stagflation is omnipresent. Our range of portfolios are heavily diversified to help dampen the volatility of market disruption. If you have any immediate concerns or would like to further understand anything discussed in our investment reports, please contact your adviser. Otherwise, we look forward to seeing you in our next meeting.

 

Past performance is not a reliable indicator of future returns. The value of investments and the income from them can go down as well as up, so you may not get back what they invest. Investors should note that the views expressed may no longer be current and may have already been acted upon. Changes in currency exchange rates may affect the value of an investment in overseas markets. Investments in small and emerging markets can also be more volatile than other more developed markets.

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