Clarion Investment Diary January 2023

The Clarion Investment Committee met on the 12^th of January 2023. The following notes summarise the main points of consideration in the Investment Committee discussions.

(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 although now at a slightly slower pace and inflationary pressures have continued to ease slightly. These developments were widely anticipated by the Clarion Investment Committee and factored into the investment strategy decisions outlined below).

Economic, Political and Stock Market Snapshot

Economics

The UK economy unexpectedly grew by 1% between October and November thanks to greater services output driven partly by the FIFA Men’s Football World Cup.
The World Bank and IMF both warned that the global economy is on the brink of a recession as financial conditions have tightened in response to higher inflation.
US inflation fell to 6.5% in the year to December, the lowest rate in a year, driven by falling energy prices. Markets expect the US Federal Reserve to slow down the rate of interest rate rises to 25bp.
German GDP rose by 1.9% in 2022 despite the impact of the Ukraine war on energy prices, but it was a slowdown from the previous year’s growth of 2.6%
Euro area unemployment fell to 10.8m in November, the lowest since records began, providing further evidence of a tight European labour market.
Euro area annual house price growth slowed sharply to 6.8% in the fourth quarter of 2022 after peaking at 9.2% as higher interest rates cooled housing demand.
Euro area industrial production exceeded expectations, growing by 1% between October and December.
770,000 UK households risk defaulting on their mortgages due to rising interest rate payments, according to the Financial Conduct Authority.
Online job ads fell for the first time since the start of the pandemic, in the second week of January, pointing to a cooling of the UK labour market.
Russia recorded a budget deficit of 2.3% of GDP as the cost of fighting in Ukraine drove overall military spending up by 26%, while tax revenues increased by 10% owing to higher energy prices.

Business

Goldman Sachs began to lay off 3,200 workers and Blackrock announced 500 job cuts following reduced investment banking activity last year.
Crypto exchange Coinbase announced a 25% cut to its workforce due to the downturn in the crypto market in 2022 and a gloomy outlook for 2023.
Amazon announced it would close three UK warehouses in addition to cutting 18,000 jobs due to an increase in financial costs and falling consumer spending.
Liberty Steel warned it would cut production and axe more than 400 jobs in the UK due to higher input costs.
Stock prices of recruiting firms Robert Walters and Page Group fell sharply as labour demand cools ahead of an economic slowdown in the UK.
Sainsbury’s, Tesco and Marks & Spencer Food reported profits in line with forecasts for 2022, supported by rising grocery sales last year.
Homebuilders Taylor Wimpey, Persimmon and Barratt Developments announced cutbacks to new projects in 2023 following a slowdown in the UK housing market.

Stock Market

Asset markets have been on a rollercoaster ride since January 2022. Between January and October of last year, the market was in so-called ‘risk off’ mode. Fear of recession and inflation caused investors to switch away from assets whose fortunes depend on growth and low inflation. Investors stampeded from equities and government bonds into supposedly safer assets such as cash, commodities, utilities and pharmaceuticals.
That process has gone into reverse since 1 November. Riskier assets and government bonds have benefitted from a growing perception that inflation is near a peak and that interest rates may not need to rise as far as previously expected. China has dropped virtually all COVID restrictions, boosting hopes of a Chinese rebound and an end to supply chain problems. Meanwhile, growth data have come in rather stronger than expected, especially in the euro area.
Expectations for inflation, interest rates and growth matter hugely for asset values. For most of last year markets were coping with higher-than-expected inflation and interest rates, and weaker-than-expected growth. Investors switched out of riskier assets into cash, commodities and high-dividend equities. But better news on growth and inflation has triggered a so-called Santa rally from November that has extended into the new year.
Views vary on the sustainability of this rally. Sceptics note that valuations, especially in the US equity market, are high, that profits have further to fall and that bear markets are often punctuated by temporary recoveries. Optimists argue that markets have already discounted recessions and are now looking forward to recoveries later this year.
But as far as the real economy is concerned, the big picture is unchanged. The richer economies are in for a period of, at best, weak growth and, for many, recession.
It’s worth looking in more detail at how assets fared in 2022 as a whole, treating the equity sell-off and the post-November rally as one. Despite late gains, the big picture remains of a flight to safety. Equities had a bad year as did government and corporate bonds. Shares in smaller companies, which tend to be more vulnerable to downturns, suffered more than bigger companies.
Tech stocks had a rotten year. Meta lost 64% of its value and Amazon and Netflix about half. Cryptocurrencies were hit by the fallout from the failure of FTX and other crypto-related assets. Bitcoin fell over 60%. The big car manufacturers were buffeted by supply shortages, higher costs and the prospect of weaker growth with shares in VW and GM dropping by over 40%. Growth-dependent sectors, like real estate, travel and leisure, retail and media suffered more than less cyclical ones like pharma.
Inflation erodes the value of government bonds that had one of their worst years since the 1980s. UK gilts suffered most, losing 26% of their value last year, with the panic triggered by large unfunded tax cuts in September’s mini-budget accounting for much of the damage.
Some assets did well. The UK’s FTSE 100 index prospered, in part due to the strong performance of UK banks and oil and gas shares. The composition of the UK equity market, with low exposure to technology and heavy weighting in banks, commodity stocks and companies with dollar revenues, enabled it to outperform. The FTSE 100 index recently closed at almost an all-time high of 7,844. This might seem odd given that the UK is expected to drop into a deeper recession than any of its peers this year, but the index is a poor proxy for the wider economy. FTSE 100 companies derive more than half their earnings from outside the UK and the composition of the index does not reflect the composition of UK GDP. Equity valuations are, in theory, forward-looking, capturing future prospects, not just current economic activity.
In currency markets the dollar was last year’s big winner, rising 5%. Investors want to hold dollars in uncertain times, especially when US interest rates are, as they were last year, rising rapidly.

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 offer some upside opportunities following a sharp rise in bond yields last year, 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 yield curves to normalise with yields at the shorter end of the curve falling and yields at the longer end rising. The Committee have increased the exposure to interest rate risk slightly over the last six 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 more 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. Within the US, the average P/E ratio is approximately two standard deviations higher than the global average. This is significantly higher than the UK & Europe and higher than Asia and Emerging Markets. It is the Committee’s view that the US equity market is likely to have a risk of further contraction compared to markets trading at lower valuations.

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. 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.

Asia Pacific & Emerging Market equities also trade at reasonable valuations with current headwinds such as a significant increase in Covid cases in China following relaxation of the zero-covid policy already priced in. The more tolerant Covid policy in China has already had a positive impact on investor sentiment in the region. The region also offers upside in contrarian central bank policy with inflation remaining subdued, which ought to be supportive of equities. The managers retain an overweight position in Asia Pacific and Emerging Market equities.

The key strategic 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 rather than growth style companies.
Slightly overweight Emerging Markets, Asia & Japan. 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.
Overweight UK.
Slight increase in duration in fixed income with a small move from short-date bonds to medium-dated corporate bonds.

We have entered a period of “Great Normalisation”, during which market participants are likely to experience further volatility before markets stabilise and prepare for the next stage of growth. There has already been significant capital destruction across several asset classes. Approximately £350billion fall in the value of long bonds and significant falls in excess of 60% in ‘trendy’ assets such as cryptocurrencies (Bitcoin is down c.64.2%), and investor darling growth stocks such as Tesla and Meta which are both down in excess of 50%. Many other assets have seen a temporary loss in value; however, these are unlikely to be permanent.

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 is most likely to 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 protect 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 look to be structurally long term.

Keith W Thompson

Clarion Group Chairman

January 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:

	30/12/21 30/12/20 to to 30/12/22 30/12/21
CIM DT03 Defender Portfolio	-9.82% 3.69%
ARC Sterling Cautious PCI	-7.39% 4.23%
IA Mixed Investment 0-35% Shares	-10.87% 2.84%

Changes to the Defender Portfolio

There were no changes made to the Defender portfolio in January 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:

	30/12/21 to 30/12/22	30/12/20 to 30/12/21	30/12/19 to 30/12/20	30/12/18 to 30/12/19	30/12/17 to 30/12/18
MGTS Clarion Prudence P Acc	-11.99%	5.61%	2.13%	12.50%	-5.90%
CIM DT04 Prudence Portfolio	-11.87%	6.28%	3.05%	12.13%	-5.23%
ARC Sterling Cautious PCI	-7.39%	4.23%	4.20%	8.05%	-3.63%
IA Mixed Investment 20-60% Shares	-9.47%	7.20%	3.51%	11.84%	-5.10%

Changes to the Prudence Fund & Portfolio

There were no changes made to the Prudence portfolio in January 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:

	30/12/21 to 30/12/22	30/12/20 to 30/12/21
MGTS Clarion Navigator P Acc	-12.36%	7.59%
CIM DT05 Navigator Portfolio	-11.74%	8.22%
IA Mixed Investment 40-85% Shares	-10.04%	10.94%

ARC Sterling Balanced Asset PCI -8.75% 7.64%

Changes to the Navigator Fund & Portfolio

There were no changes made to the Navigator portfolio in January 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:

	30/12/21 to 30/12/22	30/12/20 to 30/12/21	30/12/19 to 30/12/20	30/12/18 to 30/12/19	30/12/17 to 30/12/18
MGTS Clarion Meridian P Acc	-13.24%	8.25%	6.15%	15.51%	-7.84%
CIM DT06 Meridian Portfolio	-12.58%	9.02%	7.39%	15.67%	-6.89%
ARC Steady Growth PCI	-9.76%	10.24%	4.56%	15.00%	-5.64%
IA Mixed Investment 40-85% Shares	-10.04%	10.94%	5.32%	15.78%	-6.11%

Changes to the Meridian Fund & Portfolio

There were no changes made to the Meridian portfolio in January 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:

	30/12/21 to 30/12/22	30/12/20 to 30/12/21	30/12/19 to 30/12/20	30/12/18 to 30/12/19	30/12/17 to 30/12/18
MGTS Clarion Explorer P Acc	-13.16%	8.91%	9.12%	16.94%	-6.41%
CIM DT07 Explorer Portfolio	-12.90%	9.72%	9.83%	16.31%	-5.61%
ARC Equity Risk PCI	-10.86%	12.31%	5.82%	18.04%	-6.50%
IA Flexible Investment	-8.98%	11.30%	6.70%	15.66%	-6.72%

Changes to the Explorer Fund & Portfolio

There were no changes made to the Explorer portfolio in January 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:

30/12/21

30/12/22

30/12/20

30/12/21

CIM DT08 Voyager Portfolio

-13.99%

7.66%

ARC Equity Risk PCI

-10.86%

12.31%

Changes to the Voyager Portfolio

There were no changes made to the Voyager portfolio in January 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:

30/12/21

30/12/22

30/12/20

30/12/21

CIM DT09 Adventurer Portfolio

-12.88%

4.43%

ARC Equity Risk PCI

-10.86%

12.31%

Changes to the Adventurer Portfolio

There were no changes made to the Voyager portfolio in January 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:

30/12/21

30/12/22

30/12/20

30/12/21

CIM DT10 Pioneer Portfolio

-12.20%

2.66%

ARC Equity Risk PCI

-10.86%

12.31%

Changes to the Pioneer Portfolio

There were no changes made to the Pioneer portfolio in January 202

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.