23.10 Liontrust Views Autumn 2023 Literature (Single) - Flipbook - Page 5
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Market backdrop
Equities mostly weakened globally over the third
quarter of the year, with only the UK and Japan seeing
moderately positive returns.
The quarter had started well, with US equities recording
their fifth consecutive month of gains in July – their longest
monthly winning streak since the summer of 2021.
Investors were also encouraged by data pointing to
falling inflation and a US economic recovery gathering
momentum. Technology giant Nvidia stunned markets
with Q2 results that smashed forecasts, becoming the
highlight of an earnings season that saw S&P 500
companies exceed expectations but still receive a
lukewarm response from investors.
However, investors took fright at leading central banks
warning at their annual Jackson Hole Symposium in
August that it was too early to declare victory over
inflation and that interest rates would have to stay
‘higher for longer’ to tackle it. The message had a
detrimental impact on equities, but especially on bonds,
whose prices are inversely related to interest rates.
Their comments wrong-footed some investors who
believed that interest rates had peaked and so had
returned to the fixed income markets this year to lock
in the higher yields (interest paid) on offer. As investors
adjusted their expectations for interest rate policies in
the US and Europe, a sell-off in bonds pushed up yields
(and prices down) on US treasuries, gilts and European
government bonds to multi-year highs.
What we are doing
The fall in bond prices seen in the last quarter impacted
the lower risk funds negatively because they hold higher
exposures to fixed income. But target exposure to global
government bonds, which were worst hit by the market
moves, is just 1% in these funds. The higher risk-profile
funds have materially less exposure to fixed income.
Our overall view on bonds is largely neutral, although
we did raise our ranking on investment grade corporate
bonds from neutral to positive in the last quarter. We
believe the yields on these bonds are good and credit
risks are low compared with government bonds.
We have also reduced our ranking on emerging market
debt from positive to neutral. We thought the yields
available on these bonds earlier this year represented a
good return for the lower credit quality. However, the yields
have since fallen and investors should not underestimate
the relative risks posed by emerging markets.
We believe value can
still be found in the US
beneath the technology
behemoths and the US
economy remains in
relatively solid shape
These modest changes reflect the long-term nature of
our investment process, which is designed to be both
patient and disciplined, and our reluctance to overtrade. There have been similar periods in the past when
bursts of trading have been followed by little activity.
The periods of heightened activity have occurred during
major movements in investment markets that presented
opportunities or challenges.
In recent years, the most significant changes we have
made were in May 2022 and February 2023. In the
first case, our view was that the post-Covid relief rally
had ended due to the Russian invasion of Ukraine and
we were moving into a higher-risk and inflationary
environment. We dialled down risk in May 2022 in our
first tactical asset allocation review after the invasion. In
the second case, we believed that markets had priced
in all the pain throughout 2022 and before the news
flow turned we were adding risk to our target exposures
once more.
With regards to the strong performance of US equities,
we have exposure to the AI theme through US growthstyle managers and index funds, especially in our
higher risk funds in which target exposure to US equities
can be as high as 35%. But we remain careful. We
believe value can still be found in the US beneath the
technology behemoths and the US economy remains in
relatively solid shape.
LIONTRUST VIEWS – AUTUMN
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