True lifelong financial planning for the serious business of life.
True lifelong financial planning
for the serious business of life.
True lifelong financial planning for the serious business of life.
True lifelong financial planning
for the serious business of life.
Category: Financial Planning
The Clarion Investment Committee met on 18 January 2024. 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.
Please click here to access the January Economic and Stock Market Commentary written by Clarion Group Chairman, Keith Thompson.
Both real and economic storm clouds are battering the UK. Yet while there are reasons for concern, we can also allow ourselves some cheerfulness about economic and market prospects.
Firstly, just as the pandemic crisis faded out of sight in 2022/23, the inflation crisis which followed is now gradually moving into the rear-view mirror.
Secondly, the UK economy avoided the predicted severe recession last year although admittedly it ended the year close to a very mild one.
Thirdly, household cost pressures are easing with the fall in inflation. Through real wage growth households are gaining purchasing power which should lead to upwards momentum in retail spending. Many households have also now rebuilt the savings buffer they lost in 2022. Although rail and NHS strikes persist, there’s likely to be no more talk of “a return to the disruption of 1970s”.
Cheaper mortgage rates will spur the housing market and will also benefit the estimated 1.5 million households who need to remortgage this year as their old lower fixed rate deals come to an end.
The Centre for Economics and Business Research (CEBR) calculates that the UK will maintain its position as the world’s sixth largest economy over the next few years and will grow more quickly than France & Germany. Notably the CEBR also says India will become the world’s 3rd largest economy by 2035.
This stabilising macro backdrop will encourage business confidence, and willingness to invest in the future. Some business surveys are showing positive signs.
There are also several tail winds for the UK equity market. Inflation continues to fall yet the economy has remained largely resilient to higher interest rates. Share buy backs, and as a result, cash flow and dividend per share growth, continue in earnest. Valuations remain low and international investors are starting to wake up to the compelling value in UK shares.
There may be tax giveaways in forthcoming Budget on the 6th of March and the stock market will be buoyed as much by US interest rate cuts as by UK ones. The Bank of England base rate is expected to fall to 3.25% by the end of the year, even in the face of the BoE’s concern over tightness in labour markets continuing to drive strong wage growth.
The macro environment in 2023 was not conducive to small & medium cap stocks in the US which tend to underperform their larger peers when there is greater uncertainty about the direction of the US Economy.
As we moved into December, however, it became clear that elements of inflation were subsiding, supporting a view that the Federal Reserve would pause their rate hiking cycle and cut rates in 2024.
The Federal Reserve confirmed this expectation citing that interest rates were having their intended effect on demand and labour (and therefore inflation). The Fed also pulled forward the prospect of interest rate cuts in the belief that housing costs including rents (a major component of CPI) would tumble over the next year due to significantly increased supply.
This prompted a sharp rally in equity markets, and in particular the share prices of those companies most sensitive to an improved macro environment.
This resulted in an extremely strong period for small and medium cap stocks, an area of the US market which has been favoured by the investment committee in recent months.
After outperforming UK equities and keeping pace with the S&P 500 in the 12 months after the pandemic, Emerging Markets (EM) equities have lagged their Developed Markets counterparts.
The exceptional strength of the US dollar is one headwind that can explain this. Another has been weakness in the Chinese market driven by capital flight from the country due to increasing geopolitical tensions with the West.
As the largest constituent in the index, this has weighed on broader performance. However, some areas such as India and Latin America are performing strongly.
EMs are also feeling the pressure from the same issues that are affecting equity markets all around the world. However, the significant valuation discounts to, in particular, US equities, coupled with the greater growth opportunities over time mean investors should look through the current uncertainty and maintain a meaningful allocation to EM.
There have been no further changes to the bond allocation and the investment committee believe the current strategy is best placed to deal with short-term interest rate decisions from central banks.
The investment committee could consider exposure to longer-dated assets as a viable strategy when there are clearer signs that interest rates will start to fall, and the risk of central bank policy error diminishes.
The investment committee also favour an overweight to the UK and underweight the US against the relevant benchmarks on a valuation basis. In the US, the committee are specifically underweight the ‘Magnificent Seven’ stocks which are trading on astronomical valuations.
Although the committee see benefits in the long term for AI technology, it is felt that the euphoria has been overstated and either revaluation or future underperformance will result from these extreme valuations. In both the UK and US, the committee also look towards small and mid-cap equities which have undergone a period of subdued performance but have future recession risk priced into the assets.
Asia and Emerging Markets are also overweighted against the relevant sectors on a valuation basis. The committee see a positive, long-term picture in China which is still being held back by a fallible property sector, but valuations in the region outweigh these risks and offer a persuasive argument for outperformance once these factors have been rectified.
The key themes can be summarised below as:
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
January 2024
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The chart below shows the historical performance of the Defender Portfolio against a relevant benchmark since the start of the available data.
The chart below shows the historical performance of the Prudence Portfolio against a relevant benchmark since the start of the available data.
The chart below shows the historical performance of the Navigator Portfolio against a relevant benchmark since the start of the available data.
The chart below shows the historical performance of the Meridian Portfolio against a relevant benchmark since the start of the available data.
The chart below shows the historical performance of the Explorer Portfolio against a relevant benchmark since the start of the available data.
The chart below shows the historical performance of the Voyager Portfolio against a relevant benchmark since the start of the available data.
The chart below shows the historical performance of the Adventurer Portfolio against a relevant benchmark since the start of the available data.
The chart below shows the historical performance of the Pioneer Portfolio against a relevant benchmark since the start of the available data.
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.
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From the whole team at Clarion, merry Christmas and a happy new year.