Valuation Commentary
APRIL 2023
Following a year such as 2022, one can be forgiven for thinking that calm might return to markets in the new year. This has not been the case as economic and market data continue to paint an uncertain outlook, causing continued volatility as investors try to accurately price risk and reward. As one would expect, tough markets are when we are most busy, not only ensuring our theses for existing holdings remain intact, but also in searching for quality assets that have sold off despite having very attractive longer-term prospects.
INFLATION – PERSISTS BUT AT MUCH LOWER LEVELS
The impact of the interest rates hikes across the major developed markets is starting to feed through into the real economy, with stresses visible in interest rate sensitive sectors such as housing and financials. This is likely to lead to tighter financial conditions which should slow growth.
Inflation remains stubbornly high, most notably in the UK, where the most recent CPI print was again in double digits. Despite this higher print, the base case is still for sharply lower inflation by year-end in most, if not all, major markets.
Central bank willingness to fight inflation with further interest rate hikes may be waning as the effect of action already taken begins to impact economic stability.
INVESTMENT IMPLICATIONS
We came into the year relatively defensively positioned and, despite the rally which started in Q4 extending into January, we continue to believe this is the best course of action for now.
The longer-term outlook across asset classes remains constructive as the weakness across markets in 2022 means that valuations are now more reasonable and, in some cases, the most attractive we have seen in over a decade.
Patience is key, with only one modest change to portfolio positioning made during Q1. We reduced the significant position in Alternative Income in favour of greater diversification across assets, specifically increasing the allocation to Specialist Fixed Income which currently trades at an attractive level.
In the immediate future we continue to believe that being more defensive is appropriate as the economic outlook is expected to weaken, with certain assets not fully reflecting these risks, in our view. We expect there will be an opportunity to make more substantial changes to positioning in 2023, that likely includes putting more risk asset exposure in portfolios. However, with reasonable cashflow-backed yields across asset classes, portfolio investments are being paid well while we wait patiently and dispassionately for more attractive entry points that we expect to drive strong long-term inflation beating returns.
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