Fairview Monthly Update - May 2023

On the surface it felt like a modicum of calm had been restored to investment markets in April after the turmoil in the banking sector sent tremors through global financial markets in March. Corporate earnings improved sentiment. However, the month ended with the high-profile collapse of another US regional bank, First Republic. The second largest bank to fail in US history, with JPMorgan stepping in to protect deposit holders in a US Government backed deal. 

The instability in the banking sector and focus on the strength of the economy highlights how the US continues to be the key market to watch and is likely to be the bellwether for global investor sentiment in the coming weeks. All eyes will be on the Federal Reserve at the beginning of May with probably their most unpredictable meeting in a while. Does the Fed need to hike anymore especially now that they have predicted a mild recession in 2023? Economic growth figures will also be weighing on policy makers’ minds over the pond as figures released late last week showed GDP growth slowed from 2.6% in the fourth quarter of 2022 to only 1.1% in the first quarter of 2023 - well below expectations. Monetary policy appears to be working, albeit with a much longer lag than in the past. With inflation falling sharply over the last few months is their job done? Factor in faltering growth and failing banks it will be a brave decision to hike interest rates more than 0.25%.

In the UK and Europe inflation and further rate rises remain the main issues. At home the key concern remains around inflation which is still elevated at double digits. The CPI reading for March showing a year on year rise of 10.1%, with food inflation proving to be stubbornly high. The Bank of England appear to have their hands tied and it is hard to see anything other than a rate hike. There has been some more positive Economic data at home, with consumer confidence surveys showing most optimistic readings since the start of the war in Ukraine. In Europe the latest European CPI figures (for March) showed the Eurozone inflation rate falling sharply to 6.9% in March, helped by the drop in energy prices. But core inflation remains sticky, and it is expected that the ECB will continue to tighten rates in May. The Eurozone eked out 0.1% growth during the first quarter, but there is a disparity amongst member states with Germany in particular struggling.

The disparity between corporate and economic news was highlighted during the month, with US companies delivering some decent results. According to Factset, with half the S&P 500 companies having reported quarterly earnings figures for Q1 2023 the figures show the strongest performance relative to analyst expectations since 2021. Technology giant Microsoft, Amazon, Alphabet and Meta cheered markets with better-than-expected results.

Market Watch

April was a steady month for stockmarkets: much needed after the previous one. The MSCI World Index posted a positive return of 1.6% and US, European and Japanese benchmarks also posted gains between 1.5-2% The tech focused Nasdaq fell back 3%, (despite some strong earnings updates) perhaps not surprising giving the exceptional rally in the first quarter of the year.

The UK was one of the best performing markets with the FTSE 100 rising 3.4%, financial stocks recovering from the indiscriminate selling of the sector in March. From a sector perspective, it was Non-Life Insurance leading the UK charge with a gain of just under 10%. The oil heavyweights also boosted index returns rallying ahead of results to be announced. indeed, the UK generally had a good month with small and mid-caps rising as well, with private equity activity showing signs of increasing.

The only major market to have a difficult month was China where, the Hang Seng index fell by 2.4% and MSCI China fell by 5%. The fall in Chinese equities appears surprising when you consider that GDP numbers released during April beat expectations with a 4.5% expansion in the first quarter. However, this concerned investors that the improving data may mean less stimulus from the Central Bank.

Government bond markets aren’t sure which way to turn. Will weaker economic data lead to a pause in rate hikes or will persistent inflation override growth? April appeared calmer with the ten-year US Treasury closing the month with a yield of 3.42% compared to 3.49% at the start. The ten-year Gilt was slightly more volatile and ended April paying 3.72% compared to 3.49% a month ago.

Over to the commodity markets and gold is nudging the much talked about $2,000 mark closing out the month at $1,999 an ounce – it only gained $13 during April. There are predictions of $2,500 for gold – to be fair there normally are and we have yet to meet anyone who can predict the gold price! Oil continues to be volatile with an $8 swing during April. It closed at $80.33 for a barrel of Brent after opening at $79.89. UK Natural Gas fell sharply during April as warmer weather kicked in: obviously it still trades well above long term averages.

On the Forex markets, the pound is looking in ruder health than for some time. It rose strongly against both US dollar and Yen last month and gained marginally against the Euro. This is due to signs that the economy is performing better than gloomy forecasts, but also that UK rates have further to rise to beat inflation.

Fund watch

Looking at fund sectors first and the UK featured strongly and the UK All Companies topped the tables with an average gain of 2.5% with UK Equity Income finishing third rising 2.3%. India, which has been having a tough time year to date, came second rising 2.4%. India is an odd market with many Asian fund managers liking the long-term prospects but getting nervous at valuations. China propped the sector tables last month with a fall of 6.2%. The Asia Pacific ex Japan sector was also dragged down by poor China returns. UK Index Linked Gilts, probably the most volatile sector over the last year, finished second last in April falling 4.68%; many bond managers prefer US TIPS to UK index linkers.

Turning to individual funds now and Eastern Europe funds were on the rise. There seems no discernible reason for the latter except perhaps the phone call between Presidents Xi and Zelenskyy. Is there hope for the end of the war? JPM Emerging Europe topped the pops in April with a rise of 8.3% with two other eastern European funds in the top ten. Property saw some of the biggest winners though with five funds featuring: Abrdn UK Real Estate Share fund finished second with a gain of 7.2%. It was a good month overall for Abrdn with three funds in the top ten.

The bottom of the tables looked slightly odd last month though can probably be categorised under the “ultra-long dated duration high growth assets” bucket – Nikko ARK Disruptive Innovation came last with a fall of 11.6% followed by Polar Smart Energy and the NB 5G Connectivity fund. China funds were the other obvious theme at the foot of the performance tables.

In the investment trust world, property was in vogue with the top four places all occupied by property sectors, admittedly some are fairly specialist. The property sector was probably ignited by the agreed takeover of Industrials REIT at a 42% premium. The Property UK Logistics sector was the top performer gaining 9.46%. The usual esoteric mix made the top five with Baillie Gifford’s private equity vehicle Schiehallion finishing third with a gain of over 17% on the back of a decent trading update.

Manager watch

The Bank of America Global Fund Manager Survey always makes interesting reading (although experience tells us it is not necessarily a good guide on where to invest and can often prove to be a contrarian indicator!). The latest Monthly survey showed the most bearish readings this year with fund managers allocation to bonds versus equities at the highest level since 2009. The survey shows a strong favour for defensive equity sectors (such as utilities, healthcare and consumer staples) versus cyclical sectors (such as mining, banks and energy sectors).

Having held meetings with a wide range of equity managers over the month, it has been hard to find too many short-term bulls. Certainly, the managers of the Troy Trojan fund are being very cautious holding their lowest weighting in equities in their multi-asset fund and still believe the bubble of valuations in equities is deflating.

In contrast bond managers seem much more cheerful (and if you have ever met a bond fund manager you will know how rare this is). Chris Bowie at Twenty-Four particularly likes short-dated investment grade corporate bonds which he believes have potential to be the best performing asset this year!

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