Astute Market & Fund Overview - January 2024
Welcome to the latest Astute Market and Fund Overview. We’ll start by looking at the markets, and finish with positioning in the VT Astute funds.
Since our last update, there has been an escalation in the conflict in the Middle East. The US and UK have agreed on, and carried out air strikes against Houthi rebels in Yemen, following Houthi rebel attacks on ships in the Red Sea. Whilst it remains difficult to remove the human cost of these events, we trust you will understand that, for the purpose of this update, we’ll turn to the broader impacts on the global economy.
The result of this escalation could range from temporarily redirecting ships around the Southern tips of Africa, to deeming the whole corridor unusable and redirecting ships as a long-term solution. We’ve already seen an increase in shipping costs; however, we believe that the impact of potential further increases is likely to be muted, certainly when compared to 2021/22. The world still bears the scars from delays at ports during covid-19 lockdowns, and many economies are still reeling from the impact to inflation. This happened during a perfect storm: whilst during lockdowns, many of us worked at home, ate at home, and spent recreation time Zoom-ing friends and family, demand for goods increased. And of course, when you mix restriction of supply and increase in demand you create inflationary pressure. The supply/demand dynamics are not the same this time around – as global economies are slowing, the high demand pressure no longer exists, and doesn’t hold its side of the equation.
Turning to China, it has been reported that Chinese authorities are considering putting together a package of measures to support the struggling stock market by purchasing onshore shares.
This comes as China’s unstable stock market has continued to sink this year. In recent data, the release of Gross Domestic Product (GDP) from China revealed 2023 growth of 5.2%. Comparing this to what we expect we will see from many western countries, 5.2% is a strong figure. However, when you look back at China’s historic GDP and remove the pandemic figures, 5.2% is the lowest rate this century. Furthermore, China’s zero-Covid policy ended at the start of 2023 – the impact of this led to expectations of increased domestic consumer spending, and expectations of higher GDP. We look towards the Chinese government for strong fiscal measures to provide confidence to the domestic consumer.
In the UK we had a surprise uptick in CPI inflation to 4% (from 3.9% the previous month) however the headline figure still sits a good way below the Bank of England (BoE) forecasts last year.
Similarly, over in the US, the headline Consumer Prices Index (CPI) figure ticked up slightly, but not enough to sway markets away from their current expectations for the path of interest rates. There is still a gap between the caution of central banks and the optimism of markets.
We await the Federal Reserve’s preferred measure, Personal Consumption Expenditures Price Index (PCE), which will be released later this week, however it looks plausible that inflation can be reined in gently, without damaging the economy and labour market. Accordingly, at the time of writing, the S&P 500 sits at an all-time high.
So, what have we been doing in the funds? Some key highlights from our recent activity include tweaks to the US, reduced exposure to China and seizing opportunities in fixed income.
1) In the US, we tweaked our exposure by selling our Granahan fund, and reallocating these funds to a tracker fund. This holding has exposure to the Russell 2000, with a focus on high quality companies, helping to filter out the unprofitable companies in the universe. This move ensures that the VT Astute funds still have exposure to smaller companies in the US, an area in which valuations are still heavily discounted.
2) To reduce our exposure to China, we sold our China specific fund, Allianz China, and replaced it with a quality emerging markets tracker. Our emerging markets holding still allows us access to China, given that it makes up such a large part of the emerging market asset class, however it also provides us exposure to opportunities across the broader emerging markets spectrum.
3) And finally, we made some tweaks within our fixed income position. As global bond yields spiked in October (and prices fell) due to the reality that interest rates would be higher for longer, we seized opportunities. We secured a 4.5% yield 2040 Government bond; this long-dated holding provides an attractive income, whilst also giving us the ability to sell and capture an increase in capital value if interest rates fall faster than expected. To buy this holding, we trimmed another holding, M&G UK Inflation Linked, which served us well whilst we held it, however we believe the best environment for the fund has now passed and the proceeds of the sale could be put to better work elsewhere.
See you next time.