Q3 Quarterly Investment Letter - October 2023
EXECUTIVE SUMMARY
- The global economy is in a period of desynchronised expansion, with the US demonstrating continued resilience whilst Europe and China face significant challenges.
- Headline market indices have risen despite underlying fragilities, specifically the outperformance of the so-called ‘Magnificent 7’ companies[1]. These mega-cap technology stocks have risen by 83.9%[2] in aggregate this year so far, compared to just 1.8%[2] for the equally weighted S&P 500 Index over the same period.
- US growth will most likely soften as inflation continues to normalise over the coming year. Yet the absence of significant imbalances should prevent a substantial or broad-based downturn. Subjectively, we assign a 60% probability to such a ‘soft landing’ scenario playing out over the next 12 months.
- The European economy is underperforming the US because consumers’ appetite to spend has disappointed and Europe relies more on the Chinese industrial cycle. The UK has also suffered acute headwinds relating to energy, labour market supply and political risk premium. Growth is expected to remain sluggish in the near term, but there are glimmers of light at the end of the tunnel.
- China is facing a long period of economic transition, characterised by slower growth, which is driven by the 3D’s; debt, demographics and deflation. China’s slowdown is occurring as power is concentrated in President Xi’s hands, raising tensions with the US and representing a growth risk.
- Russian stability has been threatened by the Wagner mutiny and a failing strategy in Ukraine, potentially incentivising more erratic behaviour in the months to come. Recent events in the Middle East represent a further source of geo-political uncertainty that threatens economic and market stability. Whilst developments are impossible to forecast, we remain vigilant to investment ramifications.
- Following an earnings recession that lasted nearly one year, a period of stable profit growth is consistent with our ‘soft landing’ central scenario. The equity strategy that we employ aims to participate in this growth across regions, industries and company sizes, whilst retaining tight discipline around valuations and the shifting macro-climate.
- Having held very little government bond duration over the past three years, we have incrementally increased our allocation this year. This adjustment aims to capture positive real yields and the attractive risk-reward profile for the range of outcomes we consider over the next year.
- The majority of our alternative investments are outperforming global bond markets again this year, with insurance linked securities generating double-digit returns in 2023. Private capital investments, which are held for suitable mandates, continue to perform well with valuations rising through the first half of this year. Our managers continue to find opportunities to sell businesses at good prices and provide liquidity in what is a challenging environment.
1 The Magnificent 7 companies are Apple, Amazon, Alphabet, Microsoft, Meta, Nvidia and Tesla.
2 Source: Bloomberg, total returns in USD.
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