Clarion Investment Diary December 2022

The Clarion Investment Committee met on the 5th December. The following notes summarise the main points of consideration in the Investment Committee discussions.

Economic snapshot and political snapshot

The following notes summarise the key points discussed by the investment committee at the meeting on the 5^th of December. (These notes are as at the actual date of the Investment Committee, since which time major central banks have continued with the theme of tightening monetary policy with further interest rate rises in December although now at a slower pace of 0.5%. This move was widely anticipated by the Clarion Investment Committee and factored into the investment strategy decisions outlined below)

The EU approved a cap on the cost of Russian oil at $60/barrel. The agreement includes a mechanism to keep the price cap 5% below market rate and aims to cut Russia’s income from oil sales
Consumer price inflation in the euro area fell more than expected to 10.0% in the 12 months to October
Euro area producer price inflation, which measures the change in ‘factory gate’ prices, fell by 2.9% from September to October, adding to hopes that inflation has peaked
Following protests in China against the government and continued COVID-19 restrictions, the Chinese government signalled a more pragmatic approach to controlling the spread of the virus, relaxing restrictions in a number of cities
Surveys of purchasing managers compiled by the Chinese government suggest a further deterioration in the manufacturing and services sectors activity in November as COVID-19 restrictions continued to hamper businesses
The US economy added a greater-than-expected 263,000 jobs in November leaving the unemployment rate unchanged at 3.7%
The resilience of the US labour market strengthens the case for the Fed to continue raising interest rates. However, earlier in the week the head of the Fed hinted that the bank may ease up on the pace of tightening as early as this month’s rate-setting meeting
UK house prices fell at their sharpest rate since early days of the pandemic, down 1.4% from October to November, according to figures from Nationwide. This follows a fall of 0.9% the previous month
Over 10,000 UK ambulance workers voted to take industrial action in a dispute over pay and staffing. Separately, data showed that the percentage of patients waiting in ambulances outside hospitals for over an hour hit a record high
UK prime minister Rishi Sunak has set up a dedicated unit to respond to strikes
Food banks across Europe are being forced to turn away new applicants in the face of overwhelming demand, the FT reports
The average Christmas dinner in the UK this year will be 22% more expensive than last year, the BBC reports

Business

US chipmaker Intel is offering many of its staff in Ireland three months unpaid leave as it seeks to cut costs amid falling global demand for semiconductor chips
UK retailer John Lewis announced a joint venture with investment manager Abrdn to build 1,000 homes for rent in a bid to diversify away from retail
Private equity group Blackstone limited withdrawals from its $125bn real estate fund following a rise in redemption requests
The European Commission threatened to ban Twitter unless it enforces strict content moderation rules, the FT reports
UK economic secretary to the treasury Andrew Griffith indicated that rules on ringfencing of retail banks, introduced after the global financial crisis, would be eased. The move is seen as a bid to make the City of London a more competitive global financial centre
Oil major Total said it would cut investment in the North Sea by a quarter in response to the UK government’s windfall tax on oil and gas profits

Global and political developments

US president Joe Biden said that he would be willing to talk to Russian president Vladimir Putin about ending the war in Ukraine if Mr Putin expresses an interest in concluding the conflict
The EU must change its rules on state aid to counter the competitive impact of the US’s new $369bn climate package, European Commission president Ursula von der Leyen said.
French president Emmanuel Macron has called US president Joe Biden’s package “super-aggressive”
South African president Cyril Ramaphosa faced calls to resign after an investigation found he may have broken anti-corruption laws following a scandal relating to the theft of $500,000 in cash that was concealed in a sofa in his house
The UK government is set to pay around £100m to buy out a stake in a planned nuclear reactor held by China’s state-owned energy company CGN as the country aims to reduce Chinese involvement in critical infrastructure, the FT reports
UK prime minister Rishi Sunak said that a “golden era” of UK-China relations was over but chose to describe China as a “challenge” rather than a threat
In a parliamentary by-election in Chester, UK, the opposition Labour Party held the seat with an increased vote share. Veteran psephologist John Curtice predicted that if the swing was replicated at a national level, it would deliver Labour a small majority

For a fuller version of Clarion’s Economic and Stock Market Commentary, written by Clarion Group Chairman Keith Thompson, please click here

Strategy

While bond markets recently offer some upside opportunities following a sharp rise in bond yields in August and September, it is the Committee’s view that there is a high probability increased volatility will prevail, especially at the longer end of the yield curve. The Committee expect the UK yield curve to normalise in the near term, with yield at the shorter end of the curve falling, with yields at the longer end rising. The Committee have increased exposure to interest rate risk slightly over the last three months, leaving some room to increase it further should longer-term yields rise. The Committee retain a bias to short duration debt but are monitoring developments to see if attractive valuation opportunities arise through adding appropriate duration and credit risk.

Although valuations in the US have moderated relative to their recent past, when compared to other developed markets, such as Europe or the United Kingdom, US equities continue to look expensive. The Committee are of the view that these high valuations may leave room for further downward price movements and as such the Committee retain an underweight position to the US and will likely continue to do so until attractive buy opportunities arise in this region. The possibility of a weakening dollar also supports the decision to underweight the US.

US consumer sentiment remains robust while the labour market is still tight despite Federal Reserve tightening. US equities have rallied over the last two months amid signs of moderation from the Federal Reserve in its rate hiking cycle. Factoring in a possible 50 basis point rise in December would still leave the Federal Reserve on one of its quickest historical tightening paths, with 1980 the only faster cycle in recent history, as per BlackRock’s recent Q4 Global Outlook. Growth equities remain on high multiples on a historical basis and conceivably have further to fall as tightening continues. Domestic consumption remains robust and wider US equities outside of the Mega cap stocks trade at reasonable valuations. The Committee continue to focus capital allocation lower down the market cap in the US to take advantage of the strong consumer sentiment supporting domestic businesses.

UK equities are heavily discounted compared to peer developed equities and, in the case of mid and small caps, are priced firmly with a recessionary outlook in mind. Large cap equities have held up well due to improved overseas earnings translated into sterling and robust pricing power. Surprise upside economic indicators ought to be a catalyst for improved performance. The Committee continue to overweight UK equities across the Clarion portfolio funds and model portfolios.

Asia Pacific equities also trade at reasonable valuations with current headwinds such as China’s Zero-Covid policy priced in. Signs of a more tolerant Covid policy in China could swing equities in the region substantially higher. The region also offers upside in contrarian central bank policy with inflation remaining subdued, which ought to be supportive of equities. The managers remain broadly neutral to Asia Pacific equities on this basis.

In view of the heightened level of global economic uncertainty, after careful deliberation there was unanimous agreement to only make very minor changes to the Clarion portfolios. The key themes can be summarised below:  

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 smaller cap companies over growth style companies.
Slightly underweight Asia & Japan and overweight UK.
Slight increase in duration in fixed income with a small move from short date bonds to medium dated corporate bonds.
Exposure to Emerging Market equities was broadened out by reducing the weighting to the JPM, ASI and Hermes Emerging Market Funds in favour of Invesco Perpetual EM Fund.

A new market cycle has begun with a rapid normalisation of interest rates and higher inflation expectations. Cash is unattractive as inflationary pressures look to be structurally long term. Continuing to hold a globally diversified portfolio of high-quality assets is important to protect and grow the value of savings over the long term and remains the appropriate method for allocation of investor capital. 

Continuing to hold a globally diversified portfolio of high-quality assets over the longer term remains the appropriate method for allocation of investor capital.

Keith W Thompson

Clarion Group Chairman

December 2022

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:

	30/09/21 30/09/20 to to 30/09/22 30/09/21
CIM DT03 Defender Portfolio	-9.90% 7.42%
ARC Sterling Cautious PCI	-10.13% 6.33%
IA Mixed Investment 0-35% Shares	-12.00% 6.02%

Changes to the Defender Portfolio

There were no changes made to the Defender portfolio in December 2022

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:

	30/09/21 to 30/09/22	30/09/20 to 30/09/21	30/09/19 to 30/09/20	30/09/18 to 30/09/19	30/09/17 to 30/09/18
MGTS Clarion Prudence X Acc	-12.39%	11.63%	-2.00%	1.83%	2.90%
CIM DT04 Prudence Portfolio	-12.56%	11.66%	-1.23%	2.54%	2.93%
ARC Sterling Cautious PCI	-10.13%	6.33%	1.52%	3.40%	1.29%
IA Mixed Investment 20-60% Shares	-10.56%	12.21%	-1.19%	4.01%	2.60%

Changes to the Prudence Fund & Portfolio

There were no changes made to the Prudence portfolio in December 2022

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:

	30/09/21 to 30/09/22	30/09/20 to 30/09/21
MGTS Clarion Navigator X Acc	-12.48%	14.17%
CIM DT05 Navigator Portfolio	-12.77%	14.32%
IA Mixed Investment 40-85% Shares	-10.15%	16.63%

ARC Sterling Balanced Asset PCI -11.13% 10.93%

Changes to the Navigator Fund & Portfolio

The ASI Emerging Markets Income Equity Acc fund was removed from the portfolio (2.00% to 0.00%)
The JPM Emerging Markets Income C Acc fund was removed from the portfolio (2.00% to 0.00%)
The Invesco Global Emerging Markets Z Acc was added to the portfolio (0.00% to 4.00%)

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:

	30/09/21 to 30/09/22	30/09/20 to 30/09/21	30/09/19 to 30/09/20	30/09/18 to 30/09/19	30/09/17 to 30/09/18
MGTS Clarion Meridian X Acc	-13.52%	16.76%	0.00%	0.99%	6.39%
CIM DT06 Meridian Portfolio	-14.02%	17.08%	0.93%	3.36%	5.31%
ARC Steady Growth PCI	-12.02%	15.04%	-0.16%	3.82%	5.15%
IA Mixed Investment 40-85% Shares	-10.15%	16.63%	-0.19%	4.20%	5.35%

Changes to the Meridian Fund & Portfolio

The Federated Hermes Global Emerging Markets F Acc fund was removed from the portfolio (2.00% to 0.00%)
The JPM Emerging Markets Income C Acc fund had its allocation reduced from (3.00% to 2.00%)
The ASI Emerging Markets Income Equity Acc fund has its allocation reduced from (3.00% to 2.00%)
The UBS Global Emerging Markets Equity C Acc fund has its allocation increased from (2.00% to 3.00%)
The Invesco Global Emerging Markets Z Acc was added to the portfolio (0.00% to 3.00%)

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:

	30/09/21 to 30/09/22	30/09/20 to 30/09/21	30/09/19 to 30/09/20	30/09/18 to 30/09/19	30/09/17 to 30/09/18
MGTS Clarion Explorer X Acc	-14.01%	18.75%	0.86%	4.48%	8.58%
CIM DT07 Explorer Portfolio	-14.97%	19.03%	1.21%	3.97%	9.27%
ARC Equity Risk PCI	-13.49%	19.42%	-0.25%	3.84%	6.53%
IA Flexible Investment	-9.19%	18.30%	0.88%	3.24%	5.37%

Changes to the Explorer Fund & Portfolio

The Federated Hermes Global Emerging Markets F Acc fund was removed from the portfolio (2.60% to 0.00%)
The JPM Emerging Markets Income C Acc fund had its allocation reduced from (3.90% to 2.60%)
The ASI Emerging Markets Income Equity Acc fund has its allocation reduced from (3.90% to 2.60%)
The UBS Global Emerging Markets Equity C Acc fund has its allocation increased from (2.60% to 3.90%)
The Invesco Global Emerging Markets Z Acc was added to the portfolio (0.00% to 3.90%)

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:

30/09/21

30/09/22

30/09/20

30/09/21

CIM DT08 Voyager Portfolio

-16.47%

19.86%

ARC Equity Risk PCI

-13.49%

19.42%

Changes to the Voyager Portfolio

The Federated Hermes Global Emerging Markets F Acc fund was removed from the portfolio (5.40% to 0.00%)
The JPM Emerging Markets Income C Acc fund had its allocation reduced from (8.10% to 5.40%)
The ASI Emerging Markets Income Equity Acc fund has its allocation reduced from (8.10% to 5.40%)
The UBS Global Emerging Markets Equity C Acc fund has its allocation increased from (5.40% to 8.10%)
The Invesco Global Emerging Markets Z Acc was added to the portfolio (0.00% to 8.10%)

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:

30/09/21

30/09/22

30/09/20

30/09/21

CIM DT09 Adventurer Portfolio

-15.98%

18.32%

ARC Equity Risk PCI

-13.49%

19.42%

Changes to the Adventurer Portfolio

The Federated Hermes Global Emerging Markets F Acc fund was removed from the portfolio (8.00% to 0.00%)
The JPM Emerging Markets Income C Acc fund had its allocation reduced from (12.00% to 8.00%)
The ASI Emerging Markets Income Equity Acc fund has its allocation reduced from (12.00% to 8.00%)
The UBS Global Emerging Markets Equity C Acc fund has its allocation increased from (8.00% to 12.00%)
The Invesco Global Emerging Markets Z Acc was added to the portfolio (0.00% to 12.00%)

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:

30/09/21

30/09/22

30/09/20

30/09/21

CIM DT10 Pioneer Portfolio

-14.63%

18.18%

ARC Equity Risk PCI

-13.49%

19.42%

Changes to the Pioneer Portfolio

The Federated Hermes Global Emerging Markets F Acc fund was removed from the portfolio (12.60% to 0.00%)
The JPM Emerging Markets Income C Acc fund had its allocation reduced from (18.90% to 12.60%)
The ASI Emerging Markets Income Equity Acc fund has its allocation reduced from (18.90% to 12.60%)
The UBS Global Emerging Markets Equity C Acc fund has its allocation increased from (12.60% to 18.90%)
The Invesco Global Emerging Markets Z Acc was added to the portfolio (0.00% to 18.90%)

Risk Warnings

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.

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.