The Investment Committee in charge of our Core portfolios met yesterday to review recent market events. October was a challenging month, with both equity and bond markets falling. However, a strong recovery so far this month has seen those losses more than recouped, taking us back into positive territory for both the quarter and the year to date.
We discussed the inflation figures published in the US and UK in the 24 hours before we met. Both sets of data painted a more positive picture, with inflation surprising to the downside, strengthening investors’ hopes that we may have reached the top of the interest rate cycle. This fact in turn has added further momentum to the rally that we have seen month to date. However, it remains to be seen whether markets will be able to rise further, or even hold the limited gains made to date, as we have seen them fall back several times this year after similar rallies. Furthermore, whilst the data was helpful, it is too early to say that inflation has been brought under control.
Taking all of this into account, we decided not to make any changes to the portfolios at the moment. The areas in which we see value remain unchanged, including large parts of Fixed Interest, select parts of Emerging Market equities (especially China, Brazil, and Korea), UK equities, and the Japanese yen. By mixing these ideas with more defensive assets, hedging against the risk of recession, as well as being selective about which sectors we are overweight, we are happy that our positioning is well-balanced for a range of possible outcomes.
That notwithstanding, we did agree to review our US equity holdings. Our exposure to US Communication Services has performed especially well, rising 8% since we bought it in late August (5% ahead of the market), so we are considering taking profits. However, the sector has shown good margin expansion, so we may yet maintain our position. Equally, we are considering whether one of our active US holdings, that focuses on mid- and small-cap companies, is best positioned for this stage of the cycle. Whilst our core case is that the US can avoid a recession, if the Federal Reserve achieves the hoped for ‘soft landing’, we cannot be certain of this fact, and we need to be sure that we are not carrying too much exposure that will suffer in the event of a less positive outcome.
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 firstname.lastname@example.org.
Andrew Shaw, Chief Investment Officer