Clarion Investment Diary – November 2023

The Clarion Investment Committee met on 9 November 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 business activity unexpectedly grew, albeit marginally, in November as the S&P Global/Cips flash UK PMI composite output index rose to 50.1.
Net UK immigration reached an all-time high since records began in 2022, as it registered 745,000 net arrivals driven by people coming from outside the EU.
Bank of England governor Andrew Bailey warned markets not to expect inflation to quickly fall back to 2% after CPI inflation fell to 4.6% in October.
UK consumer confidence rose more than expected in November as falling inflation began to provide some relief for households.
UK productivity fell by 0.3% in the year to September, indicating output per worker has not changed from its pre-pandemic levels, according to the Office for National Statistics.
Minutes from the Federal Open Market Committee’s November meeting showed that the US Federal Reserve is reluctant to raise interest rates any further as it waits for past hikes to feed through to the economy.
UK inflation fell to 4.6% in October, down from 6.7% the month before, driven in part by a reduction in Ofgem’s energy price cap but also by a slowdown in services inflation, which is seen as a good gauge of underlying price pressures.
UK regular annual pay growth moderated slightly to 7.7% between July and September. Despite the moderation, falling inflation meant real wages increased over the period by the biggest margin for two years.
The volume of UK retail sales fell by 0.3% in October from the previous month to the lowest level since early 2021 when large parts of the country were in lockdown as households struggle with rising living costs.
US inflation fell more than expected in October to 3.2% from 3.7% in September. Treasury yields fell sharply on the news as markets anticipated a slightly lower interest rate path.
US producer prices declined by 0.5% in October, the sharpest fall since April 2020, driven by lower gasoline prices.
US retail sales fell only marginally last month, defying predictions of a larger decline as higher interest rates weaken demand. The data added weight to the view that the US economy is heading for a gradual slowdown rather than a sharp contraction.
Chinese industrial activity and consumer spending both rose more than expected in October signalling positive momentum as the economy struggles with several headwinds.
Rabobank, a major lender to agricultural businesses, expects global food prices to fall sharply next year after several years of elevated prices due to increased supply and weaker demand.
UK building society Nationwide’s chief executive Debbie Crosbie said mortgage arrears will continue to creep up, but it will be “nothing as severe as we would have thought this time last year.”
New data from the Office for National Statistics (ONS) shows UK productivity fell marginally over the last two years and in 2022 was just 1.7% above its 2007 level.
UK supermarket price inflation slowed to a 16-month low in October, according to data from research firm Kantar, providing more evidence that headline inflation should continue to fall.
Estate agent Savills expects UK house prices to drop by 3% next year, following a 4% fall this year, before returning to growth in 2025.
The IMF upgraded its forecast for Chinese GDP growth to 5.4% from 5.0% due to measures taken by the government to support the ailing property sector.
The IMF said rising wages and stalling productivity in central European economies could reduce their competitive edge, which has encouraged western companies to relocate production there.

Business

OpenAI announced that Sam Altman will return to run the company under the supervision of a new board.
Chip manufacturer Nvidia announced that it expects higher-than-forecasted revenues in Q4 2023 as strong global demand will offset declining sales in China due to tighter AI chip rules.
US carmaker Ford announced that it would scale back investments in its electric vehicle battery plant in Michigan as higher interest rates are softening demand.
Siemens Energy confirmed that it seeks to cut costs by €400m after taking a €15bn governed bailout by the German government to salvage its struggling wind turbine business due to a rapid increase in costs.
In the Autumn Statement, the UK chancellor announced the government would explore the sale of its share in the retail bank NatWest.
The share price of US retail firm Walmart fell 8% after the company said that it had noted a softening of demand in October as consumers are pressured by higher living costs.
UK fuel stations will be required to disclose profits or face hefty fines from next year after the Competition and Markets Authority voiced concerns that competition is not working to hold down prices at the pump.
A ransomware attack on China’s largest bank, the Industrial and Commercial Bank of China, disrupted the US Treasury market. The disruption exposed the vulnerability of the world’s largest market, which underpins the global financial system.
An ECB survey found that companies are increasingly moving production to “politically friendly” countries as geopolitical risk rises, which is increasing costs.
Private equity firms are increasingly focusing on extending credit to large corporates as buyout activity remains subdued and banks pull back on lending, The Wall Street Journal reports.
Low-cost UK airliner Ryanair reported a rise in profits over the summer as passenger numbers grew by 11%, despite a 24% increase in the price of the average fare.
UK retailer Marks & Spencer reported better-than-expected results for the six months to September, with profits up 56% on a year ago, boosted by higher food sales.

Global and Political Developments

UK prime minister Rishi Sunak made several changes to his cabinet, including ousting Suella Braverman as home secretary who is replaced by former foreign secretary James Cleverly, and the return of former prime minister David Cameron as foreign secretary.
The US president Joe Biden and China’s president Xi Jinping agreed to resume high-level military communication after meeting for the first time since late last year.
China’s biggest state-run newspaper called the meeting a “new starting point” for China-US relations while President Biden said: “We’re back to direct, open, clear communications”.
The Western-led price cap on Russian oil exports has been ineffective as almost none of the sea-borne crude oil leaving Russia was below the $60/b limit in October, according to a senior European government official.
The UK agreed a £4bn deal with Poland to supply Polish forces with air defence systems. It is the largest ever export deal between the two countries.
Portuguese prime minister António Costa resigned after officials searched his residence as part of an investigation into alleged corruption over the award of lithium mining concessions.
South Korea announced it would partially suspend its 2018 military pact with North Korea after Pyongyang successfully launched a military spy satellite, in a sign of rising tensions between the two countries.
The European Parliament voted to include nuclear and carbon capture technologies as sectors eligible for priority funding in the European Commission’s Net Zero Industry Act.
Germany’s defence minister Boris Pistorius pledged to increase military aid to Ukraine in a surprise visit to Kyiv.

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

Commentary

At the recent meeting, the Clarion Investment Committee reflected on the fact that inflation rates globally are approaching or past their terminal levels, hinting at a reduced likelihood of further interest rate hikes.

Whilst hoping that the peak in the current tightening had been reached, the Bond markets continued to grapple with the prospect of persistently high inflation and a longer period of elevated interest rates. Corporate credit and high yield bonds have outperformed government bonds, as hopes of a soft economic landing and the peak in interest rates held sway.

The United States may delay rate cuts in comparison to Europe and the UK due to the prevalence of long-term fixed-rate mortgages. 30-year mortgages are commonplace in the US meaning that rate hikes are unlikely to have an intrinsic impact on consumers in the short run.

Furthermore, there is a growing consensus regarding the inflationary effects of on/near-shoring, which seems to have gained bi-partisan support. While localising the production of goods creates more reliable supply chains, there is also a likelihood of increased costs.

The Israel-Palestine conflict appears to be maintaining a relatively regional stance, and markets have normalised after an initial severe reaction. However, there could still be some fallbacks in international relations, especially with the middle east and oil producing nations, as the conflict continues.

The UK’s public finances surprised recently – with the borrowing level being less than expected. This allowed the Chancellor of the Exchequer to announce a limited range of tax cuts in the Autumn Statement.

The continued flatlining of the UK economy was also a subject of discussion. Inflationary pressures (particularly from semi- and low-skilled wage growth) remains stubbornly high with interest rates, after 14 hikes so far, likely to remain higher for longer.

Quantitative tightening by Central Banks, to reduce their balance sheets, and higher interest rates, mean that major concerns persist for government debt. Bond yields, having risen steeply at the shorter end, have seen the yield curve flatten, but it remains inverted, which traditionally is a recessionary signal.

Whilst interest rate normalization continues, negative real bond returns are to be expected for the foreseeable future, as high inflation persists, and the US / global yield curves steepen. With the prospect of further periods of volatility associated with the ongoing geo-political crises, and the inevitable run in to next year’s elections in the US and UK, the IC focused on the diversification benefits of the benchmark allocations.

One significant concern revolves around debt. High-yield investments are currently unappealing, primarily due to the financial limitations of poor-performing businesses justifying their position in the high-yield sector. These enterprises may be unable to sustain the double-digit interest rates they would be required to pay.

Strategy

The Investment Committee have kept the bond holdings unchanged in recent weeks and maintain a balanced mix of short and long-duration bond strategies to align with the average duration of the corporate bond market. The Committee are comfortable with their current market exposure but will keep an eye on changes in bond yields. If bond yields increase further, they may consider adding more long-term bonds to their portfolio.

The Committee hold an underweight exposure to US stocks compared to their peers in the relevant IA sectors on a valuation basis. Many of the large US companies have valuations that may not accurately reflect the long-term value of these businesses. Instead, the Committee see valuation opportunities in smaller-cap US companies that are already pricing in recessionary factors not yet evident in the US.

Conversely, the Committee hold a marginally overweight allocation to UK equities due to attractive valuations. UK equities are currently trading well below their long-term average due to issues such as Brexit and persistent inflation. However, the Committee believe the UK has the potential to return to historical averages. Inflation in the UK is decreasing, and the labour market is easing, making UK equities seem promising for long-term outperformance compared to some other regions.

In Asian and Emerging Markets, the focus is on regions that can benefit from macroeconomic differences when compared to developed markets. China and Latin America are seen as promising in this regard. Latin American countries have dealt with inflation by raising interest rates aggressively and well ahead of the western countries, putting them ahead of the curve compared to developed markets. This may open the possibility of earlier economic stimulus, which could benefit equities in these countries.

China, on the other hand, has not faced the same inflationary issues as Western countries, which also creates an opportunity for economic stimulus. Additionally, the region is trading below long-term averages after a period of underperformance when compared to developed markets.

The key themes can be summarised below as:

In the fixed income space, we hold a well-diversified mix of government bond, corporate bond and index linked funds with a medium-term duration to mitigate risk in case interest rates do not fall as expected.
With inflation looking to be stickier in the UK due in part to higher wage growth, Index Linked Gilts look attractive at current prices.
Given the increase in interest rates, yields on Investment Grade Corporate bonds have become more attractive. Consequently, the opportunity to reduce the elevated cash allocations has been taken and moved into Global Fixed Income, rather than UK Gilts or Sterling Corporate Bonds.
A general softening in the macro environment in developed economies has prompted a very small reduction in equity exposure for the lower risk portfolios.
The IC have previously reduced the overweight exposure to UK equities in favour of Global Equities.
The IC favour an underweight exposure to US large cap and technology stocks due to high valuations and favour mid to small cap stocks as part of the overall US weighting.
Due to their greater economic resilience, Asia Pacific as well as Emerging Market Equities are favoured for the higher risk benchmarks.
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 rate, which will most likely be around 3%. 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

November 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:

Changes to the Defender Portfolio

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

Changes to the Prudence Fund & Portfolio

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

Changes to the Navigator Fund & Portfolio

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

Changes to the Meridian Fund & Portfolio

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

Changes to the Explorer Fund & Portfolio

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

Changes to the Voyager Portfolio

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

Changes to the Adventurer Portfolio

There were no changes made to the Adventurer portfolio in November 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:

Changes to the Pioneer Portfolio

There were no changes made to the Pioneer portfolio in November 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.