The Investment Committee in charge of our Gaia portfolios met today to review recent market events. After a very strong end to last year across almost all regions and asset classes, the start to this one has been more mixed. The US and Japan have started positively, whilst Emerging Markets, and China in particular, have struggled.
The macro picture remains dominated by falling inflation in many economies, and expectations that interest rates will follow. We have enjoyed very strong returns on our Fixed Interest holdings as a result, but we remain concerned that bond markets have got a little ahead of themselves, and that they are expecting earlier, and more significant, interest rate cuts than we feel is reasonable. It might seem tempting to cut our bond holdings in order to protect against any short-term increases in yields, if bond markets come to agree with us. However, with the general direction of travel for yields in the medium-term being downwards, timing such a short-term move would be very difficult. Therefore, we have decided to maintain our current positioning, and ride out any short-term volatility.
It is possible that investors begin to focus on economic growth levels in 2024 rather than inflation, and begin to worry about the risk of recession, as the impact of higher interest rates takes time to feed through to economic activity. If growth is indeed reduced, we would expect the quality companies in which we invest to perform well in relative terms. However, the one area of concern remains China. The country is a world leader in renewables, and offers attractive investment opportunities. However, with investor sentiment very negative, it would be helpful to see the government respond to the persistently weak economic data. For now, we see cheap valuations as compensating for the known risks, but we will continue to keep the situation under close review.
The final main point of conversation was the large number of elections to be held during 2024, with the US an especially high profile one. Questions have been asked about what implications a Trump victory may have for the sustainable projects funded through Joe Biden’s Inflation Reduction Act. Our instinct is that, with a lot of the projects being in Republican-voting states, he is unlikely to roll back to much of that investment. However, he would be expected to make headlines by withdrawing the US from things like the Paris Climate Accord (again!). Therefore, whilst he may well be good for economic growth in general, as he is a natural tax cutter, the noise that a second term will inevitably generate, and his unpredictable ‘shoot from the hip’ style, is likely to cause volatility, at least initially. However, we do not believe that it warrants any reduction in exposure at the moment.
In summary, we made no changes at this point, but will instead monitor events for further clarity.
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 email@example.com.
Andrew Shaw, Chief Investment Officer