Clarion Investment Diary July 2023

The Clarion Investment Committee met on the 13th of July 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 headline inflation fell to 7.9% in June with core inflation down to 6.9%, both considerably below economists’ expectations.
Grocery inflation in the UK fell for a fourth consecutive month, slowing to 14.9% as supermarkets have started to reduce the prices of some items.
UK two-year gilts fell below 5% on the back of the positive inflation data as markets expect lower terminal interest rates.
Rental inflation in the UK rose to 5.1% in June, the highest level on record, according to the ONS, as higher mortgage interest rates increase rental demand.
Retail sale volumes in Great Britain increased by 0.7% in June, much stronger growth than expected as demand shows resilience.
UK house prices fell by 0.2% in July, according to Rightmove, as mortgage interest rates continued to rise causing a 12% drop in home sales.
UK consumer confidence fell in July, the first decline since January. The drop in confidence reflected the impact of high inflation and rising interest rates.
Business insolvencies in the UK rose by 27% in the year to June as businesses struggled with rising costs and a slowing economy.
UK banks have passed on higher interest rates to savers more than their European and US counterparts, according to the Financial Times.
US banks posted stronger-than-expected profits in the second quarter bolstered by the effect of high interest rates on interest margins. US bank shares rose almost 6.0% last week.
US housing starts unexpectedly slowed in June despite the lack of housing stock which is underpinning house prices.
US consumer confidence rose again in June, hitting the highest levels for more than 18 months.
Goldman Sachs cut its probability of the US entering a recession in the next 12 months from 25% to 20% on the back of positive economic data.
China’s economy grew by 0.8% in Q2 2023, better growth than economists expected but still a considerable slowdown from the 2.2% growth in Q1.
Youth unemployment in China has hit a new record high of 21.3% in urban areas.
Russia’s central bank unexpectedly increased interest rates by one percentage point to 8.5% on expectations of higher inflation.
Japan’s inflation hit 3.3% adding pressure on the Bank of Japan’s ultra-loose monetary policy stance.

Business

United Airlines and easyJet increased their earnings guidance for 2023 due to better than anticipated international travel demand as the tourism industry continues to outperform.
Netflix added more than 6m subscribers after its password-sharing crackdown, well above analysts’ expectations.
Tesla reported that its profit margin had fallen to the lowest level in four years following a series of price cuts designed to sustain sales.
Tata Group announced that it will build a $4bn battery factory in the UK to supply Jaguar Land Rover’s electric cars, after securing state aid from the British government.
Life insurer Just Group reported more than a doubling in retirement income sales in the first half of the year, as soaring gilt yields fuel corporate pension deals and the sale of individual annuities.
UK food manufacturer Premier Foods announced that it does not plan to increase prices any further this year, in a sign of easing food inflation.
The FT reported a surge in the number of foreign students paying higher fees at the UK’s top universities squeezing places available for home students.
UK care home operators warned that higher mortgage rates and delay to government reforms risks insolvencies in the sector.

Global and political developments.

Russian security services arrested pro-war critic Igor Girkin under the allegations of extremism.
The private military company Wagner will shut its main training base in Russia by the end of
US climate envoy John Kerry announced that the US and China agreed to resume talks over the climate crisis.
A US nuclear submarine arrived in South Korea for the first time since the 1980s as part of the new bilateral agreement between the two countries.
A US official confirmed that a US soldier is being held in North Korea after crossing the inter-Korean border into the northern territory.
The US National Security Council spokesperson John Kirby criticised Russia’s exit from the Black Sea grain deal as it would “exacerbate food scarcity and harm millions of vulnerable people around the world.”
In the UK, the Labour Party won one out of the three parliamentary by-elections held last Thursday with the Conservative Party holding on to ex-PM Boris Johnson’s constituency and the LibDems taking Somerton and Frome.
Labour leader Sir Keir Starmer said London mayor Sadiq Khan needs to “reflect” on his plan to extend London’s ultra-low emission zone as the Times reported that senior shadow cabinet ministers blamed the planned extension of the zone for Labour’s unexpected failure to win the Uxbridge and South Ruislip by-election.

To access Clarion’s Economic and Stock Market Commentary, written by Clarion Group Chairman Keith Thompson, please click here

Commentary

China’s economic growth has not met expectations, underscored by troubling indicators: a decline in property sales, a notable drop of 12.4% in year-on-year exports in June, and an unresponsive retail sector. Despite these figures exceeding the forecasts of some of the more bearish economists, the lacklustre results are far from the robust post-COVID rebound many anticipated. This trend underscores the profound impact of the pandemic on China’s economic landscape. Particularly troubling is the youth unemployment figure, persistently hovering over 20% for consecutive months — a rate akin to that of Italy.

Amid these challenges, China’s recorded growth rate stood at 6.3%, falling short of the 7+% that analysts had projected. This backdrop has fuelled speculation that Beijing will intensify its support to stimulate the economy, especially given the stuttering post-COVID recovery. While experts believe that increased government spending might bolster key sectors, it is not viewed as the ultimate solution. Policymakers, in a departure from global trends, find themselves not having to fight inflation but potentially grappling with deflation, resulting from tepid demand.

An unfortunate period has beset the Ukraine war. The US marked a historical approach by sending cluster munition, weapons deemed barbaric by international humanitarian law, signed by over 100 countries. The US argument for their use being that they are cheaper than conventional weapons and have now formed an important part of US war strategy.

Further to the above, Russia has withdrawn from the Ukraine grain deal, leading many to fear an inflationary spike as Ukraine has traditionally been a mass exporter of grain. This could drive up global food prices. Russia claims the conditions of the deal have not been met by the West, stating that continuing sanctions on individuals and the state agricultural bank has led Russian exports to drop significantly. The predominant driver for increasing food costs would likely be caused by insurance companies charging “war risk insurance” on commercial shipping vessels.

Strategy

The investment committee have been reviewing the duration of the portfolios and are investigating an increase to the underlying duration of the strategies if inflation continues to provide an opportunity for greater capital appreciation at the longer end of the yield curve.

The investment committee continue to favour the UK over the US on a valuation basis. The US equity market is still highly distorted, with a few large-cap technology companies driving the performance of US equity indices. The UK equity market, on the other hand, has a much broader base and should be more resilient to a high-interest rate environment due to its higher exposure to dividend-paying companies and companies in sectors that can remain profitable in the current macroeconomic environment.

The relative market valuations also continue to act as a guiding light for the weighting of the portfolio funds with regards to the UK and US. The average price to earnings in the US being above historical averages and the UK being below historical averages. While the investment committee continue to foresee potential short-term rallies within US equities, the expectation is that the region will underperform the UK over the medium term.

The Committee are of the view that the Asia Pacific region and Emerging Markets are likely to perform ahead of their developed market counterparts over the medium term (around 3-5 years). However, there continue to be headwinds in the region that are limiting the effect of the post-COVID recovery in China as outlined above. One of the driving factors of this expected China recovery is current price to earnings ratio being around 10, with a historical high of around 34, suggesting a that significant re-rating is possible.

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 are still trading above historical valuation metrics particularly following the recent outperformance of a handful of tech stocks.
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 other than a 3% switch from the current property fund into the Time Social Long Income fund (3%), leaving 2% in the original fund. Defender to Voyager inclusive – no changes in Adventurer and Pioneer as they don’t have any property exposure.
The main reason for the switch was to reduce volatility in the portfolios and because the iShares property fund holds a significant proportion of its assets in index-linked gilts for liquidity, an asset class on which the committee currently have a negative outlook.

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

July 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:

	30/06/2022 to 30/06/2023	30/06/21 to 30/06/22	30/06/20 to 30/06/21
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

The iShares MSCI Target UK Real Estate ETF had its allocation reduced from 5.00% to 2.00%
The TIME Investments ARC Social Long Income Feeder Trust was added to the portfolio 0.00% to 3.00%

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

The iShares MSCI Target UK Real Estate ETF had its allocation reduced from 5.00% to 2.00%
The TIME Investments ARC Social Long Income Feeder Trust was added to the portfolio 0.00% to 3.00%

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

The iShares MSCI Target UK Real Estate ETF had its allocation reduced from 5.00% to 2.00%
The TIME Investments ARC Social Long Income Feeder Trust was added to the portfolio 0.00% to 3.00%

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:

	30/06/22 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

The iShares MSCI Target UK Real Estate ETF had its allocation reduced from 5.00% to 2.00%
The TIME Investments ARC Social Long Income Feeder Trust 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:

	30/06/22 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

The iShares MSCI Target UK Real Estate ETF had its allocation reduced from 5.00% to 2.00%
The TIME Investments ARC Social Long Income Feeder Trust was added to the portfolio 0.00% to 3.00%

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

30/06/23

30/06/21

30/06/22

30/06/20

30/06/21

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

The iShares MSCI Target UK Real Estate ETF had its allocation reduced from 5.00% to 2.00%
The TIME Investments ARC Social Long Income Feeder Trust was added to the portfolio 0.00% to 3.00%

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

30/06/23

30/06/21

30/06/22

30/03/20

30/06/21

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 July 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

30/06/23

30/06/21

30/06/22

30/06/20

30/06/21

CIM DT10 Pioneer 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 July 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.