The Clarion Investment Committee met on the 17th of August 2023. The following notes summarise the main points of consideration in the Investment Committee discussions but have been updated to include commentary on recent events and the wider implications for financial markets.

Economic, Political and Business Snapshot

Economics

UK inflation slowed to 6.8% in July from 7.9% in June due to lower energy costs, but underlying price pressures remained stubbornly high.
UK wages (excluding bonuses) rose at a record annual rate of 7.8% in the three months to June, beating expectations and stoking expectations of further interest rate rises.
There were still more than one million vacancies in the UK jobs market between May and July, despite that number falling by 66,000 from the prior three months.
The US Fed raised its benchmark interest rate target by 0.25 percentage points to 5.25%–5.5%, its highest level in 22 years, and announced that it was no longer forecasting a US recession.
The European Central Bank also raised its benchmark interest rate by 0.25 percentage points, matching the all-time high of 3.75% reached in 2001 and hinted that this rise may be its last.
The Bank of England increased interest rates by 25 basis points to 5.25% solidifying expectations that the Bank rate will peak at 5.75% early next year.
UK prime minister Rishi Sunak said that inflation is not falling as fast as he would like, and the government must make “difficult” decisions to combat it.
The UK government announced plans for hundreds of new North Sea oil and gas licenses amid criticisms that the policy will hamper efforts to reach its net zero targets by 2050
The Bank of England announced that former Fed chair Ben Bernanke will lead a review of its forecasting following criticism for failing to forecast the significant rise in inflation seen over the past two years
The UK economy grew by a greater-than-expected 0.2% from the first quarter to the second quarter with output rising 0.5% between May and June.
Business investment surged in the second quarter while UK manufacturing output bounced in June. Together, these figures make a UK recession this year look less likely.
US headline inflation picked up 3.2% in the 12 months to July, up from 3.0% the previous month, largely due to base effects from the comparison period last year. With core inflation falling from 4.8% to 4.7%, this data supports the case that the US Fed will keep interest rates on hold at its next meeting.
Chinese headline inflation dropped into negative territory as consumer prices fell by 0.3% in the year to July while Chinese exports and imports saw greater-than-expected falls of 14.5% and 12.4% in the same period, pointing to weakness in the world’s second largest economy.
The International Energy Agency reported that global oil demand hit a record high of 103m barrels per day amidst higher demand in advanced economies and China, and the recovery in air travel.
The US economy grew by 0.6% between the first and the second quarters, a stronger than expected outcome but US job growth was weaker than expected in July and job vacancies dropped to a two-year low
Together with a slight rise in US consumer spending in June, higher consumer confidence in July and slower than expected wage growth in the second quarter, this strengthens the case for a soft landing – that the US will bring inflation under control without a deep recession
Fitch Ratings unexpectedly downgraded the US’s debt to AA from AAA due to concerns about the path of fiscal policy and the erosion of governance
US equities fell and US Treasuries yields reached nine-month highs following the debt downgrade by Fitch Ratings
According to Nationwide, UK house prices fell by 3.8% in the year to June, the biggest annual drop since 2009
Euro area inflation fell to 5.3% in July in line with expectations, but core inflation remained at 5.5%
The Brazilian central bank was the first to start monetary easing in Latin America by cutting the interest rate by 50 basis points to 13.25%
The yuan slid to the weakest level since November and China’s sovereign bonds rallied after the central bank unexpectedly cut a key interest rate to boost its ailing economy.
The PBOC cut the rate on its one-year MLF loans by 15 bps to 2.5% and lowered the seven-day reverse repo rate by 10 bps to 1.8%. Fixed-asset investment from January to July was also worse than expected.
Separately, authorities are considering cutting stamp duty on stock trades for the first time since 2008, people familiar said.

Business

Western allies of Ukraine are moderating their expectations for the Ukrainian counter-offensive against heavily entrenched Russian troops, CNN reports. Weather conditions are expected to deteriorate in the autumn, slowing Ukrainian advances.
Saudi Arabia is seeking to join the UK, Japan and Italy’s next generation fighter aircraft project, the FT reports.
Nearly a third of UK flights were cancelled or delayed in the first five months of this year as the industry continues to deal with lingering pandemic disruptions, airspace closures, strikes and bad weather.
The recovery in business travel by air has stalled at around 60% to 70% of pre-pandemic levels in Europe and 75% in the US according to airline figures.
UK homewares retailer Wilko appointed an administrator after failing to find a buyer, highlighting the difficult conditions on UK high streets.
UK junior doctors took four days of strike action in a pay dispute while separately data showed that NHS waiting lists hit a fresh record of 7.57m in June.
US online retailer Amazon is reportedly monitoring staff attendance in the office using badge swipes and writing to staff who are in fewer than three days a week.
Teleconferencing provider Zoom announced it would require staff to attend the office for at least two days a week.
The four largest retail banks in the UK have seen deposit outflows of nearly £80bn in the year to June 2023, in part due to savers seeking higher interest rates at smaller competitors, the FT reports.
US banks’ loan losses hit their highest level in over three years in the second quarter driven by losses on credit card lending and commercial property.
The Italian government watered down plans for a windfall tax on banks following a sharp fall in their share prices
Ferrari upgraded its profit outlook for the year as buyers personalising their cars boosted revenues, in the latest sign that the luxury market continues to outperform.
BAE Systems increased its earning guidance for the year as the Ukraine war increased defence sales by 11%.
Pharmaceutical company Pfizer’s revenues halved in Q2 2023 and demand for its COVID-19 products fell sharply.
Uber reported its first operating profits in Q2 2023 thanks to cost-cutting measures after years of heavy spending and aggressive growth.
The UK’s financial regulator vowed to “take action” if banks failed to pass on higher interest rates to savers.
IAG, owner of British Airways, and Air France-KLM both announced record profits as robust demand for flights has met an industry-wide shortage of planes.

Global and political developments

Ecuadorian presidential candidate Fernando Villavicencio was assassinated at a campaign rally. Mr Villavicencio had campaigned against corruption and his murder comes amid rising violence stemming from the drugs trade in the South American country.
The US attorney-general appointed a special counsel to investigate US president Joe Biden’s son Hunter Biden, complicating a case that is being closely followed by the president’s opponents.
The US government announced a ban on US investment into Chinese quantum computing, artificial intelligence and advanced microchip sectors. The UK is reportedly considering similar measures.
The Police Service of Northern Ireland accidentally published the details and locations of its 10,000 officers and staff, potentially exposing them to attacks by dissident republicans
Wildfires in the US state of Hawaii killed at least 200 people
Iran released five American prisoners to house arrest as part of a deal that would see Iranian funds unfrozen and Iranian prisoners freed in the US, Reuters reports
The UK’s High Court ruled that Labour mayor Sadiq Khan’s decision to expand London’s Ultra Low Emission Zone was lawful following a legal challenge by five Conservative-led councils. The zone will expand on 29 August.
The chief executives of the banks NatWest and Coutts resigned following controversy over an inaccurate report that prominent Brexit supporter Nigel Farage’s account was closed for purely commercial reasons.
Former US president Donald Trump was charged with obstruction and wilful retention of national defence information, adding to existing charges. He was also indicted in connection with attempts to overturn the results of the 2020 election.
Russia is to lower its maximum conscription age from 30 to 27, increasing its pool of available recruits as the war in Ukraine continues.
Russian local authorities handed out weapons to civilians in the Belgorod region that borders Ukraine, following the Ukrainian counteroffensive
Russian attacks on Ukrainian grain silos added to worries of global food shortages as wheat prices rose by 4% early last week
The European Commission clarified that weapons supplied to Ukraine can only be used for self-defence purposes after drones hit Moscow on Tuesday for the second time in three days

Please click here to access the August Economic and Stock Market Commentary written by Clarion Group Chairman, Keith Thompson.

Commentary

Big changes in China

Something is going on in China. Of that we can be sure. What exactly is happening, maddeningly, is harder to discern, but any major and unscheduled change in personnel matters. Last month, the world’s second largest economy made two of them.

The most eye-catching is that Pan Gongsheng has been appointed as governor of China’s central bank, taking over from Yi Gang who reached the official retirement age (65). Pan is an experienced economist and is seen as a competent, skilled, and outspoken technocrat who can help steer China through its economic problems. Pan also has experience in this type of role, being a deputy governor of the bank since 2012. U.S. Treasury Secretary Janet Yellen referred to Pan as the “acting governor” during her recent Beijing visit, so it was clear he was being lined up for the top job.

Earlier in July, Pan was also named the Communist Party’s secretary for the People’s Bank of China (PBOC), so this represents the first time in around five years that one person holds the top two roles at the PBOC. Unlike central banks in the West, China’s central bank takes it’s orders from the government (namely the State Council led by Premier Li Qiang) and needs approval before making big decisions on interest rates or currency interventions.

Pan’s dual role could signify that big, co-ordinated moves are being planned to lift China’s economy. Investors are hoping for more financial boosts, especially after a recent interest rate cut but time will tell whether Pan’s appointment represents a change from the cautious approach taken under Yi’s leadership.

The challenges ahead

China exports fell sharply in July, dropping 14.5% compared to the previous year; global inflation and reduced demand for Chinese goods are largely to blame. However, the domestic market is also somewhat sluggish, disappointing investors who expected levels of demand to surge following the re-opening of the post-Covid economy. These factors combined mean that it is going to be difficult for China to reach their 5% growth target for 2023.

But there is a silver lining; China’s top brass have unveiled plans to reinforce its waning economy, and this was met with a buoyant response from the markets. The Yuan and various Chinese-listed stocks rallied, with the Hang Seng Index registering a 4% surge, followed by the CSI 300 and the Shanghai Composite, which rose by 3% and 2%, respectively. These investment endeavours predominantly aim at stimulating domestic demand. Such decisive economic manoeuvres can be attributed to the sustained turmoil in the property sector since the 2021 Evergrande debacle and the startling 21% unemployment rate reported in 2023’s second quarter.

The UK’s Economic Rollercoaster

Back in the UK, the Bank of England raised interest rates to a 15-year high of 5.25% and warned that borrowing costs are likely to remain elevated. Although inflation is slowing down, (declining more than expected to 6.8% in July) the economy is not out of the woods yet with the Monetary Policy Committee cautioning “it was too early to conclude that the economy is at or very close to a significant turning point”.

The bank’s updated forecasts suggest that even if interest rates rise further, in line with recent market expectations, it will still take until mid-2025 for inflation to fall to the Bank of England’s 2% target. It also said it expects GDP to remain steady at a quarterly pace of 0.2% in the near term, but to weaken as the effects of higher interest rates add up, though avoiding a recession.

UK house prices have recorded the largest annual drop in 14 years, as rising mortgage costs pile pressure on the property market, according to data from the Nationwide Building Society.

Prices for July fell 0.2% on the previous month and 3.8% compared with the same month last year, the largest fall since 2009, the Nationwide House price index showed. The average cost of a home in the UK is now £260,828. House prices have come under increasing pressure as lenders have increased mortgage costs in response to the Bank of England’s continued interest rate rises.

Rate Expectations: A moving target

Financial markets see the UK facing a higher peak in rates than elsewhere because inflation risks appear to be greater. UK headline inflation has fallen less than in the US and the euro area since the start of the year and core inflation, which has moderated in the US and the euro, has reached a 30-year high. Markets are uneasy with US wage growth of 4.4% but more worried about wage growth of 6.6% in the UK.

However, it is important not to take market predictions about interest rates as gospel. These forecasts are notoriously volatile, shifting with new data and central bank rhetoric. If UK inflation and activity figures weaken, then rate expectations will also fall. This is what happened in the US back in March, with two-year bond yields falling by over 125bps (1.25%) in the space of less than a fortnight.

US and Emerging Markets: A Tale of Two Policies

In the United States, the Federal Reserve, under the leadership of Chairman Jerome Powell, is hinting at more rate hikes (following an increase from 5.25% to 5.5% during July) to keep inflation in check. Nevertheless, he continues to proceed with caution, seeking to circumvent a profound recession and economic slump. Most policymakers endorse this approach, advocating for higher rates, which makes a rate reduction unlikely in this fiscal year.

Meanwhile, some developing economies are loosening their financial belts to stimulate growth. Brazil’s central bank, the Banco Central do Brazil, reduced their lending rate from 13.75% to 13.25% and signalled the expectation of further reductions in coming months. The rate of inflation in Chile, Mexico, and Columbia is also slowing (significantly in the case of the latter two).

The divergence in monetary policy between developed and developing countries could create a unique opportunity for businesses and consumers in these countries – as long as inflation doesn’t re-emerge following rate reductions.

Strategy

The investment committee have persistently evaluated the duration of the underlying portfolios and the duration of the underlying bond funds has been gradually lengthened in recent months. The committee decided to replace a short duration bond fund with a strategy that targets the relatively attractive yields of government gilts with 1 – 10 years to maturity. The committee anticipates that inflation will stabilise at approximately 3.5%. With long-term gilts offering yields of up to 4.4%, the prospect of securing returns above inflation was deemed favourable.

Market valuations remain notably skewed, especially with U.S. tech stocks trading at historic peaks. Specifically, U.S. Tech is trading roughly two standard deviations above its average Price-to-Earnings (P/E) ratio, underscoring the committee’s rationale for maintaining a U.S. underweight stance. Conversely, the UK market is trading slightly below one standard deviation from its average P/E ratio. The managers believe this valuation anomaly is transitory and may not persist in the medium term, hence their continued overweight stance on the UK.

The committee project that over the medium term (approximately 3-5 years), the Asia Pacific and Emerging Markets regions are poised to outpace certain developed market economies. The stimulus provides an initial boost to Asia Pacific equities, with China’s role as a primary exporter casting a broader influence over the entire region. The committee anticipate that this surge will catalyse further growth, and the region will likely sustain this robust performance until it reverts closer to its historical average pricing multiples.

The key themes are as follows:

Maintain current allocation to cash, fixed interest, and international equities.
No net increase in equity exposure, although still committed to the diversification of equity holdings globally.
Underweight US with a preference for small and mid-cap companies. Underweight growth and mega cap technology companies which despite the fall in prices last year are still trading above historical valuation metrics.
Slightly overweight Emerging Markets, Asia & Japan.
Overweight UK.
Slight increase in duration in fixed income with a small move from short-dated bonds to medium dated corporate bonds.
No changes to the underlying fund holdings

In the Committee’s view central banks are likely to shift from the previous inflation target of 2% to a higher figure or a floating range, which will most likely be around 3-4%. The amount of economic destruction required to bring inflation back to a 2% target would be too great to be justifiable. Coupled with multiple developed economies (US and Europe) trying to ease the reliance on supply chains from China, inflation is likely to be stickier, although much lower than current levels, than initially thought.

Continuing to hold a globally diversified portfolio of high-quality assets is important to provide resilience and grow the value of savings over the long term and remains the appropriate method for allocation of investor capital. Cash is unattractive as inflationary pressures, although moderating, look to be structurally long term.

Keith W Thompson
Clarion Group Chairman
August 2023

Creating better lives now and in the future for our clients, their families and those who are important to them.

Clarion Funds & Discretionary Portfolios:

Defender Managed Portfolio

The chart below shows the historical performance of the Defender Portfolio against a relevant benchmark since the start of the available data.

The table below shows the annualised performance to the last quarter end:

	30/06/22 to 30/06/23	30/06/21 to 30/06/22	30/06/20 to 30/06/21	30/06/19 to 30/06/20	30/06/18 to 30/06/19
CIM DT03 Defender Portfolio	-1.71%	-6.88%	7.80%
ARC Sterling Cautious PCI	-0.33%	-5.46%	7.25%
IA Mixed Investment 0-35% Shares	-0.85%	-8.57%	6.86%

Changes to the Defender Portfolio

There were no changes made to the Defender portfolio in August 2023

Prudence Fund & Managed Portfolio

The chart below shows the historical performance of the Prudence Portfolio against a relevant benchmark since the start of the available data.

The table below shows the annualised performance to the last quarter end:

	30/06/22 to 30/06/23	30/06/21 to 30/06/22	30/06/20 to 30/06/21	30/06/19 to 30/06/20	30/06/18 to 30/06/19
MGTS Clarion Prudence P Acc	-0.79%	-8.89%	12.39%	-1.58%	0.69%
CIM DT04 Prudence Portfolio	-0.14%	-9.06%	12.26%	-1.27%	1.43%
ARC Sterling Cautious PCI	-0.33%	-5.46%	7.25%	1.66%	2.37%
IA Mixed Investment 20-60% Shares	1.18%	-7.09%	12.74%	-0.63%	2.89%

Changes to the Prudence Fund & Portfolio

There were no changes made to the Prudence portfolio in August 2023

Navigator Fund & Managed Portfolio

The chart below shows the historical performance of the Navigator Portfolio against a relevant benchmark since the start of the available data.

The table below shows the annualised performance to the last quarter end:

	30/06/22 to 30/06/23	30/06/21 to 30/06/22	30/06/20 to 30/06/21	30/06/19 to 30/06/20	30/06/18 to 30/06/19
MGTS Clarion Navigator P Acc	0.45%	-9.44%	15.23%
CIM DT05 Navigator Portfolio	0.45%	-9.44%	15.23%	-2.21%	1.21%
ARC Sterling Balanced Asset PCI	1.49%	-6.54%	11.84%	0.50%	2.74%
IA Mixed Investment 40-85% Shares	3.25%	-7.16%	17.29%	-0.11%	3.62%

Changes to the Navigator Fund & Portfolio

There were no changes made to the Navigator portfolio in August 2023

Meridian Fund & Managed Portfolio

The chart below shows the historical performance of the Meridian Portfolio against a relevant benchmark since the start of the available data.

The table below shows the annualised performance to the last quarter end:

	30/06/22 to 30/06/23	30/06/21 to 30/06/22	30/06/20 to 30/06/21	30/06/19 to 30/06/20	30/06/18 to 30/06/19
MGTS Clarion Meridian P Acc	1.13%	-11.49%	19.74%	-0.98%	0.73%
CIM DT06 Meridian Portfolio	2.98%	-12.00%	19.73%	-0.51%	3.26%
ARC Steady Growth PCI	3.01%	-7.54%	15.87%	-0.51%	3.54%
IA Mixed Investment 40-85% Shares	3.25%	-7.16%	17.29%	-0.11%	3.62%

Changes to the Meridian Fund & Portfolio

There were no changes made to the Meridian portfolio in August 2023

Explorer Fund & Managed Portfolio

The chart below shows the historical performance of the Explorer Portfolio against a relevant benchmark since the start of the available data.

The table below shows the annualised performance to the last quarter end:

	30/06/22 to 30/06/23	30/06/21 to 30/06/22	30/06/20 to 30/06/21	30/06/19 to 30/06/20	30/06/18 to 30/06/19
MGTS Clarion Explorer P Acc	1.55%	-11.89%	22.85%	-1.20%	5.33%
CIM DT07 Explorer Portfolio	3.36%	-12.73%	22.46%	-1.09%	5.69%
ARC Equity Risk PCI	4.43%	-9.09%	20.57%	-1.13%	4.02%
IA Flexible Investment	3.29%	-7.09%	19.48%	0.31%	2.95%

Changes to the Explorer Fund & Portfolio

There were no changes made to the Explorer portfolio in August 2023

Voyager Managed Portfolio

The chart below shows the historical performance of the Voyager Portfolio against a relevant benchmark since the start of the available data.

The table below shows the annualised performance to the last quarter end:

	30/06/22 to 30/06/23	30/06/21 to 30/06/22	30/06/20 to 30/06/21	30/06/19 to 30/06/20	30/06/18 to 30/06/19
CIM DT08 Voyager Portfolio	2.26%	-14.46%	24.81%
ARC Equity Risk PCI	4.43%	-9.09%	20.57%

Changes to the Voyager Portfolio

There were no changes made to the Voyager portfolio in August 2023

Adventurer Managed Portfolio

The chart below shows the historical performance of the Adventurer Portfolio against a relevant benchmark since the start of the available data.

The table below shows the annualised performance to the last quarter end:

	30/06/22 to 30/06/23	30/06/21 to 30/06/22	30/06/20 to 30/06/21	30/06/19 to 30/06/20	30/06/18 to 30/06/19
CIM DT09 Adventurer Portfolio	3.14%	-15.60%	25.54%
ARC Equity Risk PCI	4.43%	-9.09%	20.57%

Changes to the Adventurer Portfolio

There were no changes made to the Adventurer Portfolio in August 2023

Pioneer Managed Portfolio

The chart below shows the historical performance of the Pioneer Portfolio against a relevant benchmark since the start of the available data.

The table below shows the annualised performance to the last quarter end:

	30/06/22 to 30/06/23	30/06/21 to 30/06/22	30/06/20 to 30/06/21	30/06/19 to 30/06/20	30/06/18 to 30/06/19
CIM DT09 Adventurer Portfolio	2.34%	-15.18%	26.74%
ARC Equity Risk PCI	4.43%	-9.09%	20.57%

Changes to the Pioneer Portfolio

There were no changes made to the Pioneer portfolio in August 2023

Risk Warnings

Any investment performance figures referred to relate to past performance which is not a reliable indicator of future results and should not be the sole factor of consideration when selecting a product or strategy.  The value of investments, and the income arising from them, can go down as well as up and is not guaranteed, which means that you may not get back what you invested. Unless indicated otherwise, performance figures are stated in British Pounds.  Where performance figures are stated in other currencies, changes in exchange rates may also cause an investment to fluctuate in value. 

The content of this article does not constitute financial advice and you may wish to seek professional advice based on your individual circumstances before making any financial decisions.

Clarion Investment Diary August 2023

Clarion Investment Diary August 2023

Economic, Political and Business Snapshot

Economics

Business

Global and political developments

Commentary

Big changes in China

The challenges ahead

The UK’s Economic Rollercoaster

Rate Expectations: A moving target

US and Emerging Markets: A Tale of Two Policies

Strategy

Clarion Funds & Discretionary Portfolios:

Defender Managed Portfolio

Changes to the Defender Portfolio

Prudence Fund & Managed Portfolio

Changes to the Prudence Fund & Portfolio

Navigator Fund & Managed Portfolio

Changes to the Navigator Fund & Portfolio

Meridian Fund & Managed Portfolio

Changes to the Meridian Fund & Portfolio

Explorer Fund & Managed Portfolio

Changes to the Explorer Fund & Portfolio

Voyager Managed Portfolio

Changes to the Voyager Portfolio

Adventurer Managed Portfolio

Changes to the Adventurer Portfolio

Pioneer Managed Portfolio

Changes to the Pioneer Portfolio

Risk Warnings