The Investment Committee in charge of our Core portfolios met today to review recent market events. After a strong ‘Santa Rally’ to the end of 2023, the new year has seen uncertainty within markets as they look for direction, and the portfolios fell slightly in January.
Fixed Interest markets had a difficult month, as bond markets realised that they had got ahead of themselves in when we might see interest rate cuts. Sterling assets struggled particularly, as UK inflation showed further signs of being the stickiest, but duration was the primary driver of performance, with long-duration assets selling off the most.
Within equities, the picture was mixed. The stand-out performer geographically was Japan, up 8.5%, whilst the laggard was China once again, falling 10.4% (data from the MSCI Japan and MSCI China indices respectively). Elsewhere, European and US equities made gains, the UK retreated a little, and Emerging Markets was a mixed picture. On a sector basis, Communication Services, Healthcare, and Information Technology were the strongest performers, whilst Materials and Utilities lagged. We reviewed all geographies and sectors, but discussions concentrated on a few particular issues:
- Japan has had a good run, and is not the cheapest equity market on a number of metrics. However, we felt that now was not the time to cut our position, as corporate governance changes are ongoing in Japan, and the yen remains attractive at such low levels.
- The continued rise of the ‘Magnificent 7’ in the US has taken concentration levels within the S&P500 well above that seen in the ‘tech bubble’ of 1999/2000, with the top 10 stocks now making up over 30% of the total capitalisation of the market. Having a small number of companies dominate performance in this way makes it very hard to be underweight them in the short-term. However, as they become more and more expensive, having a full weighting may be more of a risk than not. We agreed that our exposure was adequate, acknowledging that it is underweight, but not too dramatically so.
- China remains a real challenge. On a valuation basis, many Chinese companies are optically cheap versus their long-term historical average. However, the possibility that China has changed structurally, and that those averages are no longer a useful market, cannot be dismissed. With geopolitical risks around US/China relations remaining, no sign of a resolution to the mess that is the Chinese property sector, and a government that continues to dabble in markets, the question remains: is China a huge opportunity or a value trap? We agreed to continue working with the analysts to try to get more clarity on this key issue.
In summary, we made no changes to the portfolios, but will continue to review events, with further short-term work to be done on China.
