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Core Investment Committee Update

The Investment Committee in charge of our Core portfolios met today to review recent market events. November was a more positive month, with many equity and bond markets across the globe performing strongly. Whilst December to date has been a more mixed picture, many markets have held on to last month’s gains.

Whilst it is never possible to be certain what has driven markets, it appears that investors are more willing to believe in the possibility of a soft landing for the global economy, and the US in particular. This remains our core case, and whilst we acknowledge that we could be wrong, recent data has done nothing to change our view. Evidence that inflation is rolling over has been followed by an improvement in business confidence indicators from previously low levels that might have indicated an impending recession. Even within the jobs market, where central bankers are possibly not yet seeing the relaxation that they would want, there are some signs that wage pressures are easing.

The major exception to the recent market rises was China. Investor sentiment towards the country remains very poor, with concerns about the level of debt within the economy, and how it will weigh on growth prospects. Whilst we recognise the issue, we believe that the underlying performance of a lot of Chinese companies makes them attractive, especially at an ever cheaper price. Therefore, we agreed to maintain our overall exposure. However, we did decide to sell out of our active holding, Baillie Gifford China, and use the proceeds to add to Franklin FTSE China ETF. With us seeing a lot of value within the mega cap companies that make up a large part of the index, we feel that we can gain the exposure that we want through the ETF, whilst enjoying the lower charges that come with a passive option.

Elsewhere, we continued our discussion from last month’s meeting about our US equity holdings, with our particular concern being that we may have more small-cap exposure than we want if our core case of a soft landing does not play out. However, with meaningful price moves in our holdings recently, we agreed to take a little more time to consider what we want our exposure to look like after any changes, as well as considering exit points on anything that we are likely to sell or reduce.

In summary, the areas in which we see value remain largely unchanged, including large parts of Fixed Interest, select parts of Emerging Market equities (especially China, Brazil, and Korea), UK equities, and the Japanese yen. It should be noted that the valuation argument around our holdings in Brazil and Korea is somewhat lessened after they enjoyed a very strong month in November, rising 9.2% and 10.4% respectively. For now, we believe that they have further upside potential, but we will watch carefully for signs that they are approaching fair value. Overall, we continue to mix risk assets that we believe have an asymmetric returns profile in our favour with more defensive assets (including targeted sector exposure), hedging against the risk of recession so that we are well-positioned for a range of possible outcomes.

Should you wish to discuss anything in this note, or about our portfolios in general, please feel free to contact me on 020 3697 8902 or andrew.shaw@phoenix-wm.co.uk.

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