As 2023 draws to a close, we reflect on the year that was and the events and circumstances that have shaped
our world over the last several years. The global landscape has been complex and trying, impacting our lives
and the markets in ways we could never have predicted.
In addition to the aftermath of the Covid-19 pandemic, geopolitical tensions around the world have reminded
us of their far-reaching impact on the global economy. Central banks’ decisions to raise interest rates in
response to persistent inflation have posed challenges for investors and consumers alike. The resulting impact
on the cost of living has been felt by many, requiring prudent financial planning and thoughtful investment
strategies to mitigate its effects.
As we move forward, we recognise that uncertainties persist and we remain committed to navigating these
challenges and adapting our strategies to achieve your investment objective. There are several long-term
trends reshaping the investment landscape and we have made key decisions to position portfolios for this.
Firstly, in response to the higher interest rate expectations early in the year, we increased our exposure to
government bonds within the portfolios that hold this asset class. This was funded through a reduction in
equities which provides an opportunity for the portfolios to benefit from a higher interest rate world.
Secondly, our equity allocation favours higher-quality companies which often have stable earnings and can
provide a buffer against economic downturns. This is because these companies typically have strong balance
sheets, reliable cash flows and strong pricing power. They also often have lower debt levels, making them less
sensitive to higher interest rates. We also believe that their ability to pay reliable dividends will provide
investors with an income stream which is particularly valuable in times of market volatility.
This view is also expressed in our corporate bond allocation where we have a higher allocation to investment
grade bonds, particularly with shorter maturities of between one to three years and up to five years. These
bonds are the highest quality non-government bonds as determined by a credit rating agency. The companies
which issue these bonds are less likely to default on their debt obligations, even in challenging economic
conditions. These bonds also now offer higher interest payments which provide a steady return.
Lastly, the diversification of portfolios is enhanced through an allocation to alternative investments. These
investments often have a risk and return profile that is less dependent on traditional market drivers and
therefore they may follow a return journey that is less correlated to traditional investments. Our allocation
includes investments which are classified as either a risk diversifier or a return enhancer. As the market
continues to assess what higher interest rates mean for consumer spending, corporate profitability and
ultimately, share prices, we believe that a higher allocation to risk diversifying assets will be beneficial.
Typically, in periods of heightened volatility and uncertainty, the defensive characteristics of these assets can
provide a safety net when other asset classes drop in value. For example, if stocks go down, a risk diversifying
asset might go up or stay the same.
Looking into 2024 and beyond, there are many different factors at play and we have grouped them into three
categories. Namely, deglobalisation due to rising geopolitical tensions and the need for greater supply chain
resilience; decarbonisation or energy security as economies transition to a new energy mix; and demographic
constraints, where income inequality clashes with a continued reduction in workforce supply. Together, these
form what we’ve called the ‘3D Reset’ and it’s already breaking down the patterns of the past decade.
A year in review and an outlook for 2024 1
The period post the global financial crisis was characterised by extremely low interest rates, providing
companies with access to cheap capital, making it easier for them to finance their operations and growth
initiatives. This was particularly favourable for industries like technology which experienced very decent
returns. In contrast, higher interest rates make borrowing more expensive and this puts pressure on company
earnings. The full impact of interest rate increases to date has not yet been felt and the risk of a recession
remains. Higher interest rates also impact consumer spending, which can be seen specifically in the Eurozone
and the UK. While the probability of a US recession has fallen, it has not disappeared altogether. Growth in the
US is expected to remain relatively robust early in 2024, before slowing later in the year.
In this new environment, we expect our equity fund managers to identify areas with structural, under
appreciated growth. These are often sectors or industries that are poised for growth due to underlying
macroeconomic, technological, or demographic trends, but which may not yet be fully recognised by the
market. Companies with a sustained competitive advantage, such as strong brand value, proprietary
technology, or dominant market position is a key aspect of this approach. Equity market performance has been
narrow this year with “the Magnificent 7” (Apple, Alphabet, Amazon, Microsoft, Meta, Nvidia, Tesla) accounting
for much of the positive performance. New technology is creating incredible opportunities however, and we
believe that the benefits will be more widespread. It is therefore important to maintain diversified exposure at
both the regional and sector level.
The unprecedented bond market falls seen over the last three years are likely now in the history books and we
must shift our focus towards the opportunities that lie ahead. The 3D Reset suggests that central banks may be
more focused on controlling inflation, at the expense of growth. This means that government spending may
play a larger role in supporting economic growth in the future. However, with government debt already at high
levels, this approach could lead to increased volatility in bond markets.
To mitigate this risk, we are limiting our exposure to very long dated government bonds. These bonds are
particularly sensitive to changes in interest rates and could suffer significant price declines in a volatile market.
We also see opportunity debt issued by Emerging Markets such as Brazil and India. Furthermore, the strength
of the US dollar, which has a significant impact on emerging market debt, may be tested if US economic
growth slows down significantly and the Federal Reserve cuts interest rates aggressively. A weaker dollar can
be beneficial for emerging market debt, as it makes it cheaper for emerging market countries to service their
dollar-denominated debt.
In a structurally higher inflation regime, we typically see the equity and bond markets move in tandem where
everything tends to do well or fall together. With this in mind, managing portfolio risk becomes more
important. Commodities for example, did not provide significant diversification benefits in a low inflation
world. They now look more interesting as a potential hedge against inflation and geopolitical tension. In the
near term, a slowdown in economic growth, especially in China, is a risk for commodity prices alongside
concerns around rapid energy supply growth. The longer-term impact of deglobalisation could provide a
hedge against supply shocks and decarbonisation is likely to lead to additional demand for metals as part of
the energy transition. By being dynamic in our allocation to alternative assets we can make adjustments in
response to changing market conditions. For now, we are focused on the defensive characteristics of
alternatives while keeping a close eye on assets which have the potential to deliver returns that are higher than
those of traditional assets. Increasing our exposure to these assets will need to be balanced with the level of
risk taken on.
As the landscape changes, we apply a disciplined focus on risk management and conducted rigorous research
to identify opportunities amidst challenges. We extend our heartfelt gratitude for your trust, loyalty and
continued confidence in our commitment to diligently managing your investments. We wish you and your
loved ones a happy festive season, a relaxing holiday period and a prosperous new year.