December 20th, 2023
December MPS Update
Rewind to the end of October, and investors were digesting an unappetising start to the fourth quarter of the year. US Treasuries had sold off once again, with the 10-year yield hitting its highest level in 16 years, while the S&P 500 had officially entered correction territory after three consecutive negative months.
Fast forward just over five weeks and markets are now reflecting on the best month for global equity returns in three years, and the best rally for bond markets in nearly four decades, albeit after a period of sustained weakness in the case of the latter. Data suggesting a gradually slowing, but still growing global economy, evidence of falling inflation in the US, UK and Europe, as well as more ‘dovish’ central bank rhetoric, have reinforced the narrative that we are on course for a soft economic landing, successfully taming inflation while managing to avoid a sharp recession.
Whether it will be as smooth sailing as currently envisaged or not, markets now see central banks not only ceasing their aggressive cycle of interest rate increases, but cutting rates in 2024 as inflation continues to ease: a development that would likely be supportive for both bonds and equities in the absence of a sharp economic slowdown. Throw in a positive end to the third quarter earnings season, further supporting sentiment, and the result was the most positive month for equities since news of the Covid vaccine breakthrough in November 2020.
Clearly a welcome development for investors, and evidence of just how quickly sentiment – and market returns – can turn, demonstrating the importance of remaining invested.
MPS strategy returns – November
Strategy returns reflected this positive backdrop for mainstream asset classes, despite sterling strength against the US dollar eroding some of the headline-grabbing gains from across the pond.
Positive returns of between 2% and 4% were delivered by the strategies; slightly higher in the more equity-focused models. UK stocks delivered a return of just over 2% in November, underperforming other developed markets. The UK, North American and European equity allocations all outperformed their respective indices, bolstering absolute and relative returns.
Elsewhere, we also saw positive contributions from the strategies’ alternative investments, notably the commercial property and listed infrastructure holdings. Gilts were up just over 3% at the headline level, with much of this driven by a strong rally in longer-dated bonds. Shorter-dated bonds, where much of the lower-risk strategies’ exposure lies given their less volatile profile, also delivered positive, albeit more modest returns, rising approximately 1.5% in sterling terms.
DSV is a Danish listed company, and the third largest freight forwarder in the world. A freight forwarder facilitates trade in a capital light way by acting as the intermediary between the company shipping the product and the final destination for the goods. The company possesses best-in-class technology, a strong track record of capital allocation and a culture of entrepreneurialism. We think the current valuation is attractive for what we perceive to be a high quality company generating strong free cashflow, with recent share price weakness a buying opportunity
MPS strategy activity
In last month’s update we covered the rebalancing activity we undertook in October, selectively adding to bond allocations, reducing the UK equity exposure and adding to the US, moves which have proven beneficial in the short-term. There were no changes at the asset allocation level this month, but certainly some activity at the individual stock level in the US and Europe.
- In the US we made some modest adjustments to our technology sector exposure, adding to Microsoft and Nvidia while trimming Apple – a reflection of current preferences, and a demonstration of our ability to be highly targeted in our large cap US tech allocation. This moves Microsoft to a slightly larger overweight position, with Nvidia still a marginal underweight and Apple a couple of percentage points below its index weighting given recent underwhelming news flow on the stock.
- In Europe we added to our position in ING, the Dutch bank, as part of a reweighting of our European exposure to this sector. We like ING’s focus on digital innovation and its shareholder-friendly capital commitments. This move was funded by trimming the position in BNP Paribas, which remains a core holding. Finally, we added a new holding in DSV.
2023 has been a better year for investors than many expected. The gains seen mainly across equities, specifically US equities, have not occurred against a backdrop of a roaring global economy and a thriving business climate. Rather, it has been a gradual story of pessimistic expectations failing to materialise, meaning that the mere avoidance of overtly negative scenarios has been cheered by investors.
Looking ahead, we expect growth to slow as the impact of this year’s restrictive monetary policy takes a further toll. The focus is now on when central banks pivot. As key interest rates in the UK, US and Eurozone are now significantly above inflation measures, the real interest rate is firmly in restrictive territory and therefore could be reduced without providing an expansionary pulse that would threaten another surge in inflation.
Going forward, drops in inflation will be harder to come by due to base level effects fading, and we are watching closely for signs of how keen central bankers are to reduce gauges back below the 2% target, or whether they will accept slightly higher readings to support the economy. Within the next 12 months, we will also almost certainly see US and UK elections, and any surprises in these have the potential to cause a large market impact.
Please keep an eye out for further updates early in the New Year as we undertake a comprehensive review of 2023, while also providing a deep dive into our outlook and positioning of the strategies for 2024. In the meantime, we would like to thank you for your continued support, and look forward to speaking to you soon.
You can find out more about our MPS strategies, and how we executed them this November, on our YouTube channel.