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Ken Baksh – February 2023 Investment Monthly

2nd February 2023 / Leave a comment

FEBRUARY 2023 Market Report

Investment Review

Summary
During the one-month period to 31st January 2023, major equity markets, as measured by the aggregate FTSE All – World Index, rose moderately, by nearly 6%, in dollar terms, one of the best January performances in recent years. Chinese equities and related emerging markets, NASDAQ and Continental European indices led the advance. The UK and Japanese indices underperformed but still rose by 4% in local currencies. The VIX index fell, finishing the period at a level of 19.28.
Government Fixed Interest stocks also rose over the month. The UK 10-year gilt ended the month on a yield of 3.33% with corresponding yields of 3.64%, 2.29% and 0.49% in USA, Germany, and Japan respectively. Speculative and lower quality bonds, also, rose in price terms. Currency moves featured a weaker US dollar. Commodities were mixed on the month, the Chinese re-opening story prompting large moves in the industrial metals.
Monthly Review of Markets
Equities
Global Equities rose strongly in January, gaining over 5.98% in dollar terms, in aggregate, led by NASDAQ and China, and related. Amongst the major indices Japan and the UK lagged, though still each gaining over 4%. Reflecting the greater “risk on “mood the VIX index fell below 20 to a level of 19.28.
UK Sectors
Sector moves were mixed and quite large over the month, the difference between the best and worst FTA sub sectors near 20% over just one month. Travel and Leisure and retail stocks gained over 15% while non-life insurance, pharma and tobacco fell in absolute terms. Telecommunication and bank stocks were reasonably firm, partly on takeover rumours. The FTSE100 underperformed the All-Share Index for the first time in many months. By IA sectors, UK active unit trusts are matching benchmark indices, trackers etc, over the short one-month period, with small company funds about 1% behind. “Balanced” funds, by IA definitions, rose by about 3% to 3.5%, depending on the equity content.

Fixed Interest
Major global government bonds rose 2.2% in price terms over January, the UK 10-year yield for instance finishing the month at a yield of 3.33%. Other ten-year government bond yields showed closing month yields 3.52%, 2.29% and 0.49% for US, German and Japanese debt respectively. See the Bloomberg graph below to compare the “January “bond performances over the last 30 years UK corporate bonds also rose, outperforming gilts, and more speculative debt also finished the month on lower yields.
Check my recommendations in preference shares, selected corporate bonds, fixed interest ETF’s , zero-coupons, speculative high yield etc. A list of my top ideas from over 10 different asset classes is also available to subscribers.

Foreign Exchange
A stronger pound and weaker US Dollar were the main moves, where cable (£/$), for instance, rose by 2.3%The Chinese Renminbi strengthened by 2.8% against the greenback. The Japanese Yen initially showed appreciation as a follow through from December’s yield control mechanism tweak, but more nuanced Bank of Tokyo statements during the month, reversed some of the gain. Interestingly,adjusted for FX moves,UK,Japan and USA all rose by between 3% and 4% on the month.

Commodities
Industrial metals copper, aluminium and iron ore showed the largest monthly move, while natural gas and several soft commodities declined in actual terms. Gold rose modestly but other PGM’s showed little monthly change.

News
Over the recent month, there have been few major changes to formal aggregate economic growth projections, with most commentators pointing to the “management” of the US slowdown, nature and timing of the Chinese re-opening and the Russia/Ukraine conflict as being key determinants of forward-looking estimates. At regional level however, more optimism is apparent in Continental Europe.
At the same time, key data inflation indicators (headline rates, factory gate and commodity prices, shipping rates,) suggest that headline price growth is set to slow in coming months, although labour compensation developments must be watched carefully.
US
Recently announced inflation indicators showed December headline CPI of 6.5%, lower than estimates. The November PCE,the Fed’s preferred inflation metric rose at an annualised rate of 5.5% still over double the Fed target. Fourth quarter preliminary GDP growth of 2.9% (3.2% in third quarter), annualised, while higher than estimates, concealed a slower consumers’ expenditure. This relative weakness has also been backed up by consumer sentiment indicators, retail sales, housing activity, construction figures and the Empire States Survey. The Fed’s own forecasts expect GDP growth of 0.5% for 2023, and core PCE growth of 4.8% and 3.5% respectively for 2022 and 2023.The employment situation remains relatively resilient overall, despite the headline grabbing news of cutbacks in the technology sector.
At its final 2023 meeting on 14th December, the Federal Reserve raised its benchmark policy rate by 50 basis points and signalled its intention to keep squeezing the economy next year as central banks on both sides of the Atlantic enter a new phase in the battle against inflation. The new target range is 4.25% to 4.5%. Latest Fed projections below. At this time of writing we are waiting for the latest Fed move, probably 25bp increase, and the accompanying statement.

There is growing concern (again) that the US government may hit its ceiling for debt issuance this summer and spark speculation about a looming default. This “ritual” has of course been played out many times in the past, but coming this year, when the Central Bank is trying to reduce its balance sheet, there could be reasons to expect bouts of bond market volatility over coming months.

EUROPE
The European Central Bank raised interest rates by half a percentage point on December 16th taking the deposit rate to 2%, while also warning that inflation would remain above 2% for a considerable time meaning it would have to keep up rate hikes. The simultaneous announcement that the ECB would start QT from March reinforced the more “hawkish” message from the meeting. In a more detailed presentation than previous meetings, Christine Lagarde differentiated US inflation more driven by an overheating economy and tight labour market, and the ECB price levels, more driven by soaring energy and food costs.
European GDP growth estimates have, however, stabilised over the recent period, and indeed one or two sub-country third/fourth quarter releases have been marginally above expectations e.g German 2022 GDP growth of 1.9% and various more recent indictors such as PMI confidence readings and the ZEW survey, in Germany. Warmer than expected weather, government consumer and business support and resurgent Chinese demand often being cited as the main reasons.
Current ECB staff projections foresee economic growth of 3.4% for calendar 2022 and a “shallow and short recession” over the current period., taking the likely full year 2023 figure to around +0.5%. Inflation and fuel shortages remain key determinants. Some independent economic forecasters are now attaching a non-insignificant chance that Europe may avoid a recession.
December Eurozone inflation, of 9.2% (core 5.0%) was lower than expected. At the ECB meeting (above) 2023 inflation projections were raised to 6.3%

ASIA excl JAPAN
The GDP figures, shown below (source: CLSA, CEIC) show 2022 and 2023 growth projections for the Asia excl Japan region. Growth in 2023 is likely to slow slightly amid weakening domestic and external demand after 2022, the fastest since 2012, but overall, the situation still compares favourably by international comparison The reasons include a “better” Covid experience, selective commodity exposure, tourism, continued FDI Investment (especially China related) and better initial fiscal situations (compared with late 90’s for example) and limited direct connections with the Russia/Ukraine situation. The forecasts do not assume a total easing of Chinese covid rules.ASEAN,which includes Indonesia,Malaysia,Philippines,Singapre,Thailand and Vietnam expect aggregate economic growth of 4% for 2023.
Headline inflation of around 5% currently (core 3%) also compares favourably and is expected to drop to nearer 4% by end 2023 led by commodity disinflation.
CHINA
The 5.5% official GDP growth target for 2022 was predictably missed, the actual figure emerging at around 3%. Official historic data showed weakening trends in consumer spending, fixed asset investment and construction activity while more recent (December)t “live” tracking data e.g., mobility, cement production and electricity use also showed subdued economic activity. In addition, very weak trade data was released mid-December. The major historic negative issues of a very restrictive anti-Covid policy and major disruption within the property market have now been supplemented by increasing US restrictions on the production/export of certain key electronic products.

At the time of writing however, a property “rescue” package has been implemented, while on the Covid front, various relaxation measures are taking place to alleviate some of the issues above. The removal of the quarantine requirement for inbound travellers from January 8th signalled the end of the zero-Covid system that transformed China’s relationship with the outside world. Independent medical statistics and anecdotal evidence (crematorium activity,chrysanthemum sales!) show a rapid increase in Covid cases and deaths, probably exaggerated by the Chinese New Year, but a positive economic momentum is starting to build. First manifestations are starting to appear in Chinese travel and leisure statistics while a manufacturing revival will take much longer, especially in the face of slowing US demand.
At a recent cabinet meeting, premier Li Keqiang vowed to make consumption(currently only about 40% of GDP) the “driving force” of the economy, unleashing some of the savings amassed during the Covid years.

UNITED KINGDOM
Within the UK, live activity data (e.g January Gfk data) continues to show a weaker overall trend, especially within the services sector. According to this survey, released mid-January, covering the mid-month period, consumer confidence remains very low (near a 50 year low), amid the cost-of-living crisis. This followed the publication of figures showing a drop in total 2022 retails sales of over 6%. Unemployment, however, is still at a relatively low level.
According to ONS statistics, GDP fell by 0.3% between the second and third quarters, slightly more than expected, and leaving the economy 0.8% below the “pre pandemic” level. The “increase” of 0.1% in the monthly November figure may be partly due to the “World Cup” effect. The saving ratio was 1.8% during the quarter, and banks report increases in credit card borrowing.

Inflation rose at 10.5% in December a slight improvement on the November figure, with core inflation at 6.5%. Latest earning growth around 6.5% is still a concern for BoE policy makers.
The PSBR is still hovering near all-time records, with the 2022/2023 figure expected to be about £50 billion higher than the 2021/2022 figure, already a record high.
Despite some relief with the recent energy price package, until April at least, (but not other utilities-see below), shop price inflation, greater Council Tax “freedom”, upward interest/mortgage rate pressure, falling house prices, accelerating rents, insolvencies/evictions, legacy Brexit issues and strike activity, will continue to be headwinds and the outlook for economic growth over coming quarters is highly uncertain. The Bank of England expects recessionary conditions to last for a few quarters though a recent Andrew Bailey statement hinted at a less severe slowdown than forecast around the time of the ill-fated mini Budget.

Experts at consultancy EY-Parthenon, insolvency specialist Begbies Traynor and, more recently, data from Insolvency Services to December 2022 all point to a huge increase in the number of distressed companies, predominantly in the small and medium size company area. While consumer facing sectors continued to be most affected EY said that “stress” was deepening across all sectors.
Monetary policy has tightened from a 0.1% interest rate in December last year to the current level of 3.5% warning that further hikes are likely. Markets are expecting rates to be above 4.0% by mid-2023.One particularly worrying development is the number of fixed rate mortgages that must be renegotiated over next quarters at much higher rates.

scaling your positions according to your risk profile.
KEN’S TEN-2023
• Keep an overweight position in renewable/infrastructure.
• Favour value over growth generally-trade has further to run.
• Stay neutral/overweight in UK equities relative to your benchmark (page15).
• Overweight Far East,including China,Japan and other Asia (pages 16-19).
• Start switching large cap to small cap-valuation/performance.
13
• Start diversifying away from strong dollar.
• Overweight uranium relative to your commodity benchmark (page 21).
• Amongst UK sectors overweight telecom, health equipment, defence, tobacco and energy (pages 13-14),”not too ESG friendly,I am afraid”.
• Amongst UK sectors underweight luxury, motor related, most capital goods, consumer brands and food retail (pages 13-14).
• Within UK Fixed Interest prefer corporate bonds, preference shares, and zeroes to conventional gilts (page 21)-start rebuilding some fixed interest exposure, especially for cautious and balanced risk profiles.

For equities generally, the two medium term key questions will be when rising interest rates eventually cause equity derating/fund flow switches, government, corporate and household problems, and how the rate of corporate earnings growth develops after the initial snapback. Going forward, withdrawal of certain pandemic supports, uncertain consumer and corporate behaviour and cost pressures are likely to lead to great variations by sector and individual company. Investors will need to pay greater than usual attention to the end 2022 figures and accompanying forward looking statements.

Market Arithmetic

Overweight
By sector, Oil and Mining equities continue to benefit from above average yields, strong balance sheets, dollar exposure and secular demand e.g copper,lithium, cobalt for electronics, construction, electric vehicles etc. Current moves regarding Chinese re-opening the economy would be another positive for this sector.
Remain overweight in pharmaceuticals and health equipment, expect more corporate activity
Telecom-moving to overweight this area after many years of disappointment. Valuations are attractive, many tariffs have an element of index linking, windfall tax risk is low and sector consolidation is increasing.
Defence-a relatively small stock market sector in UK terms but increased global defence spending, negative PMI correlation, high barriers to entry and corporate activity will continue to lift this specialist area.
Tobacco-ESG factors aside, there is undoubted value in this sector (both major UK stocks yield around 7%). Negative correlation with PMI’s and emerging market volume growth still strong.
Banks may enjoy some relative strength from rising interest rates but continue to monitor the recession/loan growth and default risks. These mixed trends were very evident in the recent third quarter figures. Preference Shares as well as ordinary shares have attractions in this area.

Luxury Goods-Currently highly rated in stock market terms but could be vulnerable, in recessionary conditions and seem to have a strong correlation with property prices, which are expected to decline. However, renewed Chinese interest may help sector.
Domestic Breweries/pubs etc are having a hard time with stalling consumer’s expenditure, supermarket competition and rapidly rising costs.
In general, extra due diligence at stock level more generally will be required as I expect a growing number of profit warnings and downbeat forward looking statements.
However, takeover activity is also clearly increasing with, for example, private equity snapping up UK-listed companies at the fastest pace for more than twenty years. Foreign takeover, stake building is also increasing, current weak sterling being a factor, with Vodafone under scrutiny by a French (who already have BT interest!) investor. Biffa (waste management),MicroFocus(technology),Aveva(software) and RPS(professional services) have all succumbed to foreign takeovers in recent months, much by “strong dollar” American or Canadian organizations.

JAPANESE EQUITIES also remain an overweight in my view, although my recent comment re hedging may “nuanced “now following the extreme currency weakness and surprise intervention/policy change. The prospective price/book ratio of 1.2 is attracting interest of corporate and private equity buyers, while the prospective yield of 2.7% is above the world average and compares very favourably with USA (1.7%). Corporate governance is rapidly improving with diverse boards, reduction of cross holding, higher dividends etc. There are clear signs that inward investment attracted by the pro-growth, pro-deregulation agenda and relatively low costs (average Japanese annual wage $30000 compared with $75000 USA) is increasing. The political agenda is likely to include a more active defence policy,and a shift in income distribution more in favour of middle-class households. Private equity stake building interest in Toshiba and growing activity in the property sector (discount on a discount in a cheap currency) demonstrate the search for value in Japan. Investors may wish to remove currency hedges.
On a valuation basis (see table above) the forward market PE multiple of 11.9 is at a considerable discount to the world, and especially US average (16.7) and certain Japanese investment trusts yield more than UK peers.

EMERGING MARKETS– Very difficult to adopt a “blanket” approach to the region even in “normal times”, but especially difficult now, with so many different COVID, commodity, sectoral mix, debt, geo-political and increasingly natural disaster variables. See chart below The IMF recently warned that several emerging nations could disproportionately suffer from a combination of COVID and adverse reaction to “tapering” by developed counties e.g., FX/Interest rate pressures. Six countries have already defaulted during the pandemic, and the IMF is currently in various stages of bail-out discussions with Pakistan,Argentina,Zambia,Sri Lanka,Ghana,Tunisia and Egypt.

Within the emerging/frontier universe I continue to have a relatively positive view on Asia. The economic fundamentals were discussed on page 16 above, and the forward-looking multiples and dividend growth metrics appear relatively attractive in a global context. Any move by China to open more fully after their severe Covid lockdown, would of course additionally help. Exposure to the entire area can be achieved through several ETF’s and also investment trusts currently on discounts.
If a country-by-country approach is adopted, I have a longer-term positive view on Vietnam
where, the nation is supported by positive demographics, with a population of near 100 million, an emerging middle class, and a recipient of strong foreign direct investment. Qualconn,an Apple supplier, Intel(semi-conductors),Lego and Samsung(mobile phone plant) have all recently invested in new capacity in the country. Other big names moving chunks of production from China to Vietnam include Dell and HP (laptops), Google(phones)and Microsoft (Games Consoles) The economy is expected to grow at around 6.5% this year (7.7% Q2 2022) and approximately 6% in 2023 while current inflation is running at about 3.5%. One more rate hike of 50bp towards the end of the first quarter should mark the end of the tightening cycle. On a relatively low prospective PE based on forecast earnings growth over 20%, Vietnamese equities appear good value.
India, although quite highly rated and a major oil importer, warrants some inclusion in a diversified portfolio although recent corporate scandals(Adani?) require watching. Indonesia, the last of my current Asian ideas benefits from a commodity boom, strong domestic market, low debt, relatively stable currency, forecast 5% GDP growth and 5% inflation.

Caution is required in many South American markets with poor COVID-19 situations, deteriorating fiscal balances, weak investment, low productivity (see below) and governments in a state of transitioning e.g Brazil. However, some stock market valuations currently appear interesting in the region, which, so far, has been relatively unaffected by events in Ukraine. Commodity exposure, deglobalization beneficiary, valuation and recovery from a very low-level account for some year-to-date stock market relative out- performance. Many of these countries also raised interest rates at an earlier stage, allowing relative currency strength, compared with say the Euro,Yen or Sterling.

COMMODITIES– Gold spiked to over $2000 in March 2023, a recent high, when Russia invaded Ukraine, and although currently staging a modest rebound is still only $1924. Central Banks have been aggressively topping up their holdings during 2022.The longer-term prospects for more cyclical plays, however, continue to look brighter. Increased renewable initiatives, greater infrastructure spending as well as general growth, especially from Asia, are likely to keep selected commodities in demand at the same time as certain supply constraints (weather, labour and equipment shortages, Covid, transport) are biting. Current relaxation of the Chinese Covid policy, has certainly provided a boost to copper, aluminium and iron ore.
• Wheat and other grain prices have fallen from the levels reached following the Russian invasion of Ukraine, but the current grain shipment complications, planting/harvesting schedules within the region and extreme global meteorological conditions are expected to lead to further price volatility. If the conflict is prolonged it will affect millions of people living in such places as Egypt, Libya, Lebanon Tunisia, Morocco, Pakistan and Indonesia that could have political consequences. There has been renewed interest in agricultural funds as well as the soft commodities themselves.
• URANIUM-I remain positive on the outlook for nuclear energy (stable base load,carbon-friendly,government U-turns,high energy output) while being aware of some of the well know issues(time, cost and waste disposal).Uranium is expected to experience a material market deficit over the next few years (estimates range between 10% and 30% of global demand).Nearly half of current world mined supply comes from Kazakhstan/Russia. The current price of 50 cents per pound could easily rise to 60c to 70c,as a result of geopolitical tension and a sharply rising cost curve. Apart from capital good companies exposed to the reactor construction/maintenance, I strongly recommend some exposure to my favoured investment trust.

UK FIXED INTEREST-selective exposure now recommended, especially for cautious/balanced risk mandates.

The graph below plots the progress of the UK 10 year gilt yield, which is at 3.33% at the time of writing. The two key things to note are firstly, the extremely low yields prevailing, just a year ago, partly reflecting a prolonged QE programme, and secondly the “panic” level reached at the end of September as domestic and international investors briefly took flight at the prospect of the short-lived Truss/Kwarteng mini budget proposals. Translating this into price terms, the I share all gilt index fell over 35% from the beginning of the year to late September before bouncing about 13% to current levels. This is huge volatility for an asset class often regarded as haven quality!
Having been negative on gilts for several years, I am now recommending gradually re-introducing selected fixed interest stocks to balanced portfolios, especially for cautious and balanced risk mandates.
Gilts themselves will have to contend with huge supply issues over coming quarters. While not falling as much as gilts and having completely different supply/demand dynamics, selected preference shares also fell to reach yield levels of approximately 7%, while good quality corporate bonds now offer yields around 6%. For the more adventurous, annual income yields around 10% and the prospect of capital gains are also also offered on more speculative grades.

GLOBAL CLIMATE CHANGE remains a longer-term theme, and will be built into the many infrastructure initiatives, being pursued by Europe, USA, and Asia. The Russia/Ukraine conflict is accelerating the debate, and hopefully the action. There are several infrastructure/renewable investment vehicles which still appear attractive, in my view, combining well above average yields and low market correlation with low premium to asset value. The recent volatility in natural gas prices has highlighted both risks and opportunities in the production and storage of energy from alternative sources. My favoured vehicles {solar,wind,storage and infrastructure) in the UK investment trust space have delivered capital returns of approx. 10% and additional dividend income of between 5% to7% over 2022 and are expected to continue to deliver healthy total returns.

COMMERCIAL PROPERTY-
The MSCI/IPD Property Index showed a further fall in the total return across all properties in December, the decline of 3.3%), taking the full year 2022 decline to 10.1% (capital –14.2%, Income +4.7%). The monthly decline which started in July has affected all sub-sectors with industrial properties faring the worst over the full year. Rental growth however has been positive at with a 3.2% annualized gain in December taking the full year growth to 4.2% Several analysts are down grading their estimates for the sector following the rapid move in UK longer and shorter-term interest rates. Property asset valuations take time to materialise where there is a lag between balance sheet date and results publication in the listed area. Live traded property corporate bonds, however, have already moved sharply lower.
Quoted property giants British Land and Land Securities both reported deteriorating conditions writing their third quarter statements, expecting further valuation declines following rising yields.

Full asset allocation and stock selection ideas if needed for ISA/dealing accounts, pensions. Ideas for a ten stock FTSE portfolio. Stock/pooled fund lists for income, cautious or growth portfolios are available. Hedging ideas, and a list of shorter-term low risk/ high risk ideas can also be purchased.
I also undertake bespoke portfolio construction/restructuring and analysis of legacy portfolios.
Independence from any product provider and transparent charging structure
Feel free to contact regarding any investment project.
Good luck with performance!
Ken Baksh Bsc,Fellow (UK Society of Investment Professionals)
kenbaksh@btopenworld.com

1st February ,2023
Important Note: This article is not an investment recommendation and should not be relied upon when making investment decisions – investors should conduct their own comprehensive research. Please read the disclaimer.
Disclaimer: Opinions expressed herein by the author are not an investment recommendation and are not meant to be relied upon in investment decisions. The author is not acting in an investment, tax, legal or any other advisory capacity. This is not an investment research report. The author’s opinions expressed herein address only select aspects of potential investment in securities of the companies mentioned and cannot be a substitute for comprehensive investment analysis. Any analysis presented herein is illustrative in nature, limited in scope, based on an incomplete set of information, and has limitations to its accuracy. The author recommends that potential and existing investors conduct thorough investment research of their own, including detailed review of the companies’ regulatory filings, and consult a qualified investment advisor. The information upon which this material is based was obtained from sources believed to be reliable but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author’s best judgment as of the date of publication and are subject to change without notice.The author may hold positions in any of the securities mentioned
The author explicitly disclaims any liability that may arise from the use of this material.

Ken Baksh – January 2023 Investment Monthly

3rd January 2023 / Leave a comment

JANUARY 2023 Market Report

Investment Review
Summary

During the one-month period to 31st December 2022, major equity markets, as measured by the aggregate FTSE All – World Index, fell, by over 1.5%, taking the year-to-date loss to 19.3%, in $ terms. Chinese equities and related emerging market indices were relatively stable while the tech-driven NASDAQ dropped 5.6% on the month to finish down 33.54% on the year. The UK larger cap indices remained broadly unchanged over the year The VIX index fell, finishing the period at a level of 21.89.
Government Fixed Interest stocks also fell over the month, capping a very poor year The UK 10-year gilt ended the month on a yield of 3.16% with corresponding yields of 3.77%, 1.94% and 0.25% in USA, Germany, and Japan respectively. Speculative and lower quality bonds, also, fell in price terms. Currency moves featured a strong Yen. Commodities were mixed on the month, while over the full year energy and selected agricultural products significantly outperformed industrial metals such as copper, aluminium and iron ore.

Monthly Review of Markets

Equities
Global Equities fell modestly over December by 1.56% extending the full year decline to 19.31%. Most major indices declined although Chinese and related indices significantly outperformed. The NASDAQ index fell 5.64%, taking the twelve months fall to drop to 33.54% for this tech-driven universe of stocks. The FTSE 100 was one of the few indices to remain in positive territory over the year, for well documented reasons. The VIX index finished the year at a level of 21.89, a twelve month gain of 27.12%. This move reflects the degree of risk aversion compared with the” relative calm” of December 2021 (medical, geo-political and economic!), although the current level is far from “panic” territory.

UK Sectors
Sector moves were mixed over the month. Resources (commodity prices), insurance (solvency issues) and pharmaceuticals (corporate action) were amongst the month’s leading sectors, while telecoms, property, travel and retailers were major fallers. The FTSE100 outperformed the All-Share Index again ending the year about 4% ahead of the wider market index. By IA sectors, UK active unit trusts significantly underperformed benchmark indices, trackers etc, over calendar 2022, with small company funds about 20% behind the benchmark indices. Income based funds finished the year “just” down 1.7%. “Balanced” funds, by IA definitions, fell by about 10%, before fees etc over the full year. (Source: Trustnet December 31st, 2022).

Fixed Interest

Major global government bonds fell in price terms over December, the UK 10-year yield for instance finishing the month at a yield of 3.66%. Other ten-year government bond yields showed closing month yields 3.89%,2.56% and 0.41% for US, German and Japanese debt respectively. Special mention should be made of the Japanese Government bond where, the yield control process was “tweaked” late in the month. UK corporate bonds also fell, though finishing the year about 5% ahead of the government bond index in price terms and even more in total return metrics. Speculative bond prices also fell in December, to yields around 5% at the year end. More “cautious” UK balanced funds and so called 60/40 funds experienced very poor returns during 2022, as the period of global equity weakness was, somewhat unusually, accompanied by disappointing gilt returns.
Check my recommendations in preference shares, selected corporate bonds,fixed interest ETF’s , zero-coupons, speculative high yield etc. A list of my top ideas from over 10 different asset classes is also available to subscribers.

Foreign Exchange
Over the month, the Japanese “policy change” was one of the major FX events, causing the Yen to appreciate by 4.5% and 5.4% against the Pound and US Dollar respectively. Elsewhere the Chinese Yuan continue to appreciate now dropping below 7 to the US Dollar. Recent currency moves have helped the sterling adjusted Japanese equity index outperform the S&P on one- and three-month bases, and finish the year, just 1.2% behind the US on a full year basis

Commodities
Apart from a sharp fall in the natural gas price, most commodities had a quiet month in seasonally low volumes. Over the full year, the Bloomberg total and ex-agric indices rose by 27.9% and 15.45%, in dollar terms, respectively substantially outperforming most bonds and equities for well documented reasons.

Oil and gas, corn soya and uranium showed above average returns, while industrial metals copper, aluminium and iron ore declined in price terms. Despite record inflation levels and geo-political volatility, gold remained virtually unchanged over the year, in dollar terms.

News
Over the recent month, there have been few major changes to economic growth projections, with most commentators pointing to the “management” of the US slowdown, nature and timing of the Chinese re-opening and the Russia/Ukraine conflict as being key determinants of forward-looking estimates.
At the same time, key data inflation indicators (headline rates, factory gate and commodity prices, shipping rates,) suggest that headline price growth is set to slow in coming months, although labour compensation developments must be watched carefully.
More volatility is expected in oil prices as western countries impose restrictions on Russian oil.

US
Recently announced inflation indicators showed November headline CPI of 7.0%, lower than estimates, while the core inflation rate rose by 6.0%. The November PCE,the Fed’s preferred inflation metric rose at an annualised rate of 4.7%,down from 5% in October, but still over double the Fed target. Third quarter preliminary GDP growth of 2.6%, annualised, while higher than estimates concealed a weaker consumer component offset by a strong trade balance. Recent consumer sentiment indicators (November composite PMI for example), retail sales, housing activity, construction figures and the Empire States Survey back this up, showing declining trends into recent weeks. Anecdotal evidence from leading retailers reported a shift of consumer behaviour spending less on discretionary items such as electronics and furniture and more on food. The Fed’s own forecasts expect GDP growth of 0.5% for 2023, and core PCE growth of 4.8% and 3.5% respectively for 2022 and 2023
At it’s final 2023 meeting on 14th December, the Federal Reserve raised its benchmark policy rate by 50 basis points and signalled its intention to keep squeezing the economy next year as central banks on both sides of the Atlantic enter a new phase in the battle against inflation. The new target range is 4.25% to 4.5%. The median estimate for the fed fund rate by the end of 2023 rose to 5.1%. Latest Fed projections below

US midterm election results showed the Republicans narrowly taking control of the House of Representatives while the Democrats retained the Senate, a situation which could minimise more extreme policies, but also thwart some of Biden’s ambitions. Donald Trump has vowed to return in 2024, although the Republican Party is far from united at the current time and the risk of personal indictment is not negligible.

December flash Eurozone PMI released on December 18th rose to 48.8, an improvement, compared with November.
Current ECB staff projections foresee economic growth of 3.4% for calendar 2022 and a “shallow and short recession” over the current period., taking the likely full year 2023 figure to around +0.5%. Inflation and fuel shortages remain key determinants
November Eurozone inflation, just released, of 10.0% was lower than expected. At the ECB meeting (above) 2023 inflation projections were raised to 6.3%

CHINA
The 5.5% official GDP growth target for 2022 will clearly be missed, with some investment banks now forecasting below 3%. Official data shows weakening trends in consumer spending, fixed asset investment and construction activity while more recent “live” tracking data e.g., mobility, cement production and electricity use also showed subdued economic activity. In addition, very weak trade data was released mid-December. The major historic negative issues of a very restrictive anti-Covid policy and major disruption within the property market have now been supplemented by increasing US restrictions on the production/export of certain key electronic products. Rising unemployment, particularly amongst younger people is becoming an economic and increasingly political issue.
At the time of writing a property “rescue” package has been implemented, while on the Covid front, various relaxation measures are taking place to alleviate some of the issues above. The removal of the quarantine requirement for inbound travellers from January 8th signals the end of the zero-Covid system that transformed China’s relationship with the outside world. However, increasing domestic
health pressures and re-imposition of certain international covid restrictions create an uncertain environment,at the time of writing.

JAPAN
The Japanese economy contracted 1.2% on an annualized basis during the third quarter of 2022, missing forecasts of 1.1% growth, and considerably weaker than the 4.6% expansion recorded during the second quarter. This was the first down quarter of the year reflecting weak domestic consumption, a slowdown in business investment and an acceleration in imports. Estimates for the full year seem to fall mainly within the 1.5%-2.0% band. Inflation, while still well below international peers, rose by 3.7% in November, the highest in 41 years, driven by currency weakness. Headline CPI is expected to remain around this level in coming months through a combination of import prices and elevated consumer expectations
The Bank of Japan changed its yield control policy towards the end of December surprising many investors and causing immediate drops in bond prices and gain in the Japanese Yen. Although denied by the BOJ,there is growing speculation that Japan may ease back on its ultra-loose monetary policy in spring 2023 when the BoJ leadership changes.

UNITED KINGDOM
Within the UK, live activity data (e.g December Gfk data) continues to show a weaker overall trend, especially within the services sector. According to this survey, released 16th December, covering the mid-month period, consumer confidence remains very low (near 50 year low), amid the cost-of-living crisis. Unemployment, however, is still at a relatively low level.
According to ONS statistics, GDP fell by 0.3% between the second and third quarters, slightly more than expected, and leaving the economy 0.8% below the “pre pandemic” level. The saving ratio was 1.8% during the quarter.
Inflation continues to rise, the November CPI and RPI readings registering hikes of 10.7% and 14.0% respectively.
Kantar and the ONS both reported food/grocery prices rising about 15% year on year as well as turkey/egg shortages. Bloomberg’s Breakfast Index has jumped more than 21% in the 12 months to November 2022!

The PSBR is deteriorating again, largely as a results of rapidly rising interest (index linked) payments and expectations of higher public sector pay and state pensions. The most recent “official” figure showed November PSBR at £22 billion, much larger than forecast and the largest since monthly records began in 1993, according to the ONS. Current tentative estimates are that borrowing will come in at £175 billion in 2022/2023 nearly £50 billion higher than the 2021/2022 total
Despite some relief with the recent energy price package, until April at least, (but not other utilities-see below), shop price inflation, greater Council Tax “freedom”, upward interest/mortgage rate pressure, falling house prices, accelerating rents, insolvencies/evictions, legacy Brexit issues and, strike activity, will continue to be headwinds and the outlook for economic growth over coming quarters is highly uncertain. Both the Bank of England as well as the OBR and now the OECD are expecting recessionary conditions for an extended period

Experts at consultancy EY-Parthenon reported that company profit warnings had jumped from 51 to over 86 over the third quarter of 2022 citing increasing costs and overheads as the main reason, especially in consumer facing businesses. Another report from Begbies Traynor, Latest Red Flag Alert Report for Q3 2022 – 07:00:07 19 Oct 2022 – BEG News article | London Stock Exchange quoted that over 600,000 business were already in severe financial distress.
Monetary policy has tightened from a 0.1% interest rate in December last year to the current level of 3.5% warning that further hikes are likely. Markets are expecting rates to be above 4.0% by mid-2023.

Autumn Statement
On 17th November, Chancellor Hunt told a sombre House of Commons that a massive fiscal consolidation including £30 billion of spending cuts and £25 billion of tax rises was needed to restore Britain’s credibility and tame inflation. The OBR said they expected the economy to shrink 1.4% and not regain pre -pandemic levels until 2024.Inflation was expected to remain over 7% next year.
While many of the proposals had been leaked, and the market reaction was muted (first objective achieved!), there were a few positive surprises (e.g help for NHS and education) and several negatives.

Looking Forward
Given the scope for geo-political, economic uncertainty from known factors summarized above plus the “black swan” allowance for unknown developments, plus the valuation risks, more prominent in certain asset classes than others, the first message for 2023, should be diversification, and the second should clearly be scale your positions according to your risk profile.
Looking back at 2022, and comparing my view last December, published on January 1st, 2022, with the outcome.
2022 Hindsight…5 1/2 out of 7 Correct….2 very close!
• “Bonds will underperform equities”- correct .Gilts massively underperformed the FTSE100 and world equities.
• Overweight UK, correct especially FTSE 100.
• Underweight USA/overweight Japan…..correct in local currency terms..but in £ adjusted terms,I missed by 1.2%!…Moral..watch FX and use hedging where appropriate.
• Reduce “other Pacific”..correct… significantly helped by Chinese weakness.FT Asia dropped 19%.
• Overweight Europe-correct..came right towards end of year.Eurostoxx £ adj (-6.8%versus world -9.2%).
• “Avoid gold”-Gold rose by 0.47%, in dollar terms, in 2022, outperforming base metals but underperforming oil.
• Overweight renewables and infrastructure…correct…all showing absolute returns of about 15% in total return over the year compared with a 9.2% decline in sterling adjusted world equities.
Enough of the history…now looking to 2023, my strategic thoughts, ten of them, would be
KEN’S TEN-2023
• Keep an overweight position in renewable/infrastructure, especially in investment trust (page 21).
• Favour value over growth generally-trade has further to run.
• Stay neutral/overweight in UK equities relative to your benchmark (page15).
• Overweight Far East,including China,Japan and other Asia (pages 16-19).
• Start switching large cap to small cap-valuation/performance.
• Start diversifying away from strong dollar.
• Overweight uranium relative to your commodity benchmark (page 21).
• Amongst UK sectors overweight telecom, health equipment, defence, tobacco and energy (pages 13-14),”not too ESG friendly,I am afraid”.
• Amongst UK sectors underweight luxury, motor related, most capital goods, consumer brands and food retail (pages 13-14).
• Within UK Fixed Interest prefer corporate bonds, preference shares, and zeroes to conventional gilts (page 21)-start rebuilding some fixed interest exposure,especially for cautious and balanced risk profiles.

UK Equities continue to remain a relative overweight in my view, based on several conventional investment metrics (see above), longer term underperformance since the Brexit vote, style preference (value overgrowth) and international resource exposure although be aware of the numerous domestic headwinds I have highlighted above.
Value should be favoured over growth, and the FTSE 100 favoured over the FT All-Share. Apart from the style drift, remember that the non-sterling element of leading FTSE 100 companies and sectors is relatively high
Overweight
By sector, Oil and Mining equities continue to benefit from above average yields, strong balance sheets, dollar exposure and secular demand e.g copper,lithium, cobalt for electronics, construction, electric vehicles etc. Current moves regarding Chinese re-opening the economy would be another positive for this sector.
Remain overweight in pharmaceuticals and health equipment, expect more corporate activity
Telecom-moving to overweight this area after many years of disappointment. Valuations are attractive, many tariffs have an element of index linking, windfall tax risk is low and sector consolidation is increasing.
Defence-a relatively small stock market sector in UK terms but increased global defence spending, negative PMI correlation, high barriers to entry and corporate activity will continue to lift this specialist area.
Tobacco-ESG factors aside, there is undoubted value in this sector (both major UK stocks yield around 7%). Negative correlation with PMI’s and emerging market volume growth still strong.
Banks may enjoy some relative strength from rising interest rates, but continue to monitor the recession/loan growth and default risks. These mixed trends were very evident in the recent third quarter figures. Preference Shares as well as ordinary shares have attractions in this area

Underweight
Utilities- underweight in non-renewable utility stocks which may suffer from consumer and government pressures, and no longer trade on yield premia, especially against the backdrop of higher gilt yields. Infrastructure may fare better than distribution.
Housebuilders and real estate-expect depressed activity and remember that the rising interest rates have not yet been fully factored into bricks and mortar property yields. Industry data and anecdotal news from both housebuilders and REIT’s suggest further weakness to come.
Retailers are in general suffering from a combination of falling sales and rising costs and clear trends in consumers “trading down” are apparent. Anecdotal evidence shows a clear switch in consumer spending away from discretionary items such as electronics, furniture and certain clothing items. Certain on-line operations e.g Asos additionally are suffering from an element of post-Covid comparison. Food retailers are additionally facing stiff competition from discount “disruptors”. The British Retail Consortium expects another tough year for the sector looking for sales growth of just 2.3% to 3.5% i.e., volume declines.
Luxury Goods-Currently highly rated in stock market terms but could be vulnerable, in recessionary conditions and seem to have a strong correlation with property prices, which are expected to decline. However, renewed Chinese interest may help sector.
Domestic Breweries/pubs etc are having a hard time with stalling consumer’s expenditure, supermarket competition and rapidly rising costs.
In general, extra due diligence at stock level more generally will be required as I expect a growing number of profit warnings and downbeat forward looking statements. See the EY and Begbies statements on page 7 above.
However, takeover activity is also clearly increasing with, for example, private equity snapping up UK-listed companies at the fastest pace for more than twenty years. Foreign takeover, stake building is also increasing, current weak sterling being a factor, with Vodafone under scrutiny by a French (who already have BT interest!) investor. Biffa (waste management),MicroFocus(technology),Aveva(software) and RPS(professional services) have all succumbed to foreign takeovers in recent months, much by “strong dollar” American or Canadian organizations.

JAPANESE EQUITIES

also remain an overweight in my view, although my recent comment re hedging may “nuanced “now following the extreme currency weakness and surprise intervention/policy change. The prospective price/book ratio of 1.19 is attracting interest of corporate and private equity buyers, while the prospective yield of 2.6% is above the world average and compares very favourably with USA (1.7%). Corporate governance is rapidly improving with diverse boards, reduction of cross holding, higher dividends etc. There are clear signs that inward investment attracted by the pro-growth, pro-deregulation agenda and relatively low costs (average Japanese annual wage $30000 compared with $75000 USA) is increasing. The political agenda is likely to include a more active defence policy,and a shift in income distribution more in favour of middle-class households. Private equity stake building interest in Toshiba and growing activity in the property sector (discount on a discount in a cheap currency) demonstrate the search for value in Japan. Investors may wish to remove currency hedges.
On a valuation basis (see table above) the forward PE multiple of 11.8 is at a considerable discount to the world, and especially US average (15.8) and certain Japanese investment trusts yield more than UK peers, with generally stronger balance sheets and significant cash holdings.

EMERGING MARKETS-Very difficult to adopt a “blanket” approach to the region even in “normal times”, but especially difficult now, with so many different COVID, commodity, sectoral mix, debt, geo-political and increasingly natural disaster variables. See chart below The IMF recently warned that several emerging nations could disproportionately suffer from a combination of COVID and adverse reaction to “tapering” by developed counties e.g., FX/Interest rate pressures. Six countries have already defaulted during the pandemic, and the IMF is currently in various stages of bail-out discussions with Pakistan,Argentina,Zambia,Sri Lanka,Ghana,Tunisia and Egypt.

Within the emerging/frontier universe I continue to have a relatively positive view on Asia. The economic fundamentals were discussed on page 16 above, and the forward-looking multiples and dividend growth metrics appear relatively attractive in a global context. Any move by China to open more fully after their severe Covid lockdown, would of course additionally help. Exposure to the entire area can be achieved through a number of ETF’s and also investment trusts currently on discounts

If a country-by-country approach is adopted, I have a longer-term positive view on Vietnam
where, the nation is supported by positive demographics, with a population of near 100 million, an emerging middle class, and a recipient of strong foreign direct investment. Qualconn,an Apple supplier, Intel(semi-conductors),Lego and Samsung(mobile phone plant)

have all recently invested in new capacity in the country. Other big names moving chunks of production from China to Vietnam include Dell and HP (laptops), Google(phones)and Microsoft (Games Consoles) The economy is expected to grow at around 6.5% this year (7.7% Q2 2022) and approximately 6% in 2023 while current inflation is running at about 3.5%. One more rate hike of 50bp towards the end of the first quarter should mark the end of the tightening cycle. On a relatively low prospective PE based on forecast earnings growth over 20%, Vietnamese equities appear good value.
India, although quite highly rated and a major oil importer, warrants inclusion in a diversified portfolio, and is currently receiving some fund flows from “overweight” Chinese portfolios. Indonesia, the last of my current Asian ideas benefits from a commodity boom, strong domestic market, low debt, relatively stable currency, forecast 5% GDP growth and 5% inflation

market relative out- performance. Many of these countries also raised interest rates at an earlier stage, allowing relative currency strength, compared with say the Euro,Yen or Sterling.

selected bonds.

• COMMODITIES– Gold spiked to over $2000 in March, a recent high, when Russia invaded Ukraine, but has since fallen about 10%, although of course, remaining reasonably stable in many local currency terms. Central Banks have been aggressively topping up their holdings during 2022.The longer-term prospects for more cyclical plays, however, continue to look brighter. Increased renewable initiatives, greater infrastructure spending as well as general growth, especially from Asia, are likely to keep selected commodities in demand at the same time as certain supply constraints (weather, labour and equipment shortages, Covid, transport) are biting. Current relaxation of the Chinese Covid policy, may provide a boost to base metals.
• Wheat and other grain prices have fallen from the levels reached following the Russian invasion of Ukraine, but the current grain shipment complications, planting/harvesting schedules within the region and extreme global meteorological conditions are expected to lead to further price volatility. If the conflict is prolonged it will affect millions of people living in such places as Egypt, Libya, Lebanon Tunisia, Morocco, Pakistan and Indonesia that could have political consequences. There has been renewed interest in agricultural funds as well as the soft commodities themselves.
• URANIUM-I remain positive on the outlook for nuclear energy (stable base load,carbon-friendly,government U-turns,high energy output) while being aware of some of the well know issues(time, cost and waste disposal).Uranium is expected to experience a material market deficit over the next few years (estimates range between 10% and 30% of global demand).Nearly half of current world mined supply comes from Kazakhstan/Russia. The current price of 50 cents per pound could easily rise to 60c to 70c,as a result of geopolitical tension and a sharply rising cost curve. Apart from capital good companies exposed to the reactor construction/maintenance, I strongly recommend some exposure to my favoured investment trust.

UK FIXED INTEREST-selective exposure now recommended, especially for cautious/balanced risk mandates
The graph below plots the progress of the UK 10 year gilt yield, which is 3.66% at the time of writing. The two key things to note are firstly, the extremely low yields prevailing, just a year ago, partly reflecting a prolonged QE programme, and secondly the “panic” level reached at the end of September as domestic and international investors briefly took flight at the prospect of the short-lived Truss/Kwarteng mini budget proposals. Translating this into price terms, the I share all gilt index fell over 35% from the beginning of the year to late September before bouncing about 13% to current levels. This is huge volatility for an asset class often regarded as haven quality!
Having been negative on gilts for several years, I am now recommending gradually re-introducing selected fixed interest stocks to balanced portfolios, especially for cautious and balanced risk mandates.
Gilts themselves will have to contend with huge supply issues over coming quarters. While not falling as much as gilts and having completely different supply/demand dynamics, selected preference shares also fell to reach yield levels of approximately 7%, while good quality corporate bonds now offer yields around 6%. For the more adventurous, annual income yields around 10% and the prospect of capital gains are also are also offered on more speculative grades.

risks and opportunities in the production and storage of energy from alternative sources. My favoured vehicles {solar,wind,storage and infrastructure) in the UK investment trust space have delivered capital returns of approx. 10% and additional dividend income of between 5% to7% over 2022 and are expected to continue to deliver healthy total returns.

COMMERCIAL PROPERTY–
The MSCI/IPD Property Index showed a sharp fall in the total return across all properties in October, the decline of 6.4% (-6.8% capital values, +0.4% income), taking the year-to-date return to -1.6% (capital -5.2%, Income +3.8%). The monthly decline accelerated the downward trend started in July this year, especially in Industrial

Properties. Rental growth however was positive at +2.4% in October..or 4.4% annualised for the ten month period
Several analysts are down grading their estimates for the sector following the rapid move in UK longer and shorter-term interest rates. Property asset valuations take time to materialise where there is a lag between balance sheet date and results publication in the listed area. Live traded property corporate bonds, however, have already moved sharply lower.
Quoted property giants British Land and Land Securities both reported deteriorating conditions witing their third quarter statements, expecting further valuation declines following rising yields.

Full asset allocation and stock selection ideas if needed for ISA/dealing accounts, pensions. Ideas for a ten stock FTSE portfolio. Stock/pooled fund lists for income, cautious or growth

portfolios are available. Hedging ideas, and a list of shorter-term low risk/ high risk ideas can also be purchased.
I also undertake bespoke portfolio construction/restructuring and analysis of legacy portfolios.
Independence from any product provider and transparent charging structure
Feel free to contact regarding any investment project.
Good luck with performance!
Ken Baksh Bsc,Fellow (UK Society of Investment Professionals)
kenbaksh@btopenworld.com
2ndt January ,2023

Important Note: This article is not an investment recommendation and should not be relied upon when making investment decisions – investors should conduct their own comprehensive research. Please read the disclaimer.
Disclaimer: Opinions expressed herein by the author are not an investment recommendation and are not meant to be relied upon in investment decisions. The author is not acting in an investment, tax, legal or any other advisory capacity. This is not an investment research report. The author’s opinions expressed herein address only select aspects of potential investment in securities of the companies mentioned and cannot be a substitute for comprehensive investment analysis. Any analysis presented herein is illustrative in nature, limited in scope, based on an incomplete set of information, and has limitations to its accuracy. The author recommends that potential and existing investors conduct thorough investment research of their own, including detailed review of the companies’ regulatory filings, and consult a qualified investment advisor. The information upon which this material is based was obtained from sources believed to be reliable but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author’s best judgment as of the date of publication and are subject to change without notice.The author may hold positions in any of the securities mentioned
The author explicitly disclaims any liability that may arise from the use of this material.

Ken Baksh – December Investment Monthly

6th December 2022 / Leave a comment

In our December investment review, Ken discusses the macro picture in the US, Europe, China and Japan before looking at the effects of inflation. We then look at moves over the past 2 months before moving to the UK economy and issues such as consumer confidence, the trade deficit and Govt deficit, insolvencies and recession expectations. Ken highlights the good job that PM Rishi Sunak has done in steadying the ship, before we look at how previous stock picks in October and November have performed. These include Legal & General #LGEN, Smith & Nephew #SN, Begbies Traynor #BEG, Greencoat UK Wind #UKW, Whitbread #WTB, Frontier IP #FIPP, Enquest Bond #ENQ2 and Georgia Capital #CGEO. Ken then picks out four more stocks for growth, These are:

Chemring #CHG

Lloyds Preference Share #LLPC

Asia Dragon Trust #DGN

Legal & General Cyber Security ETF #ISPY

DECEMBER 2022 Market Report

Investment Review

Summary

During the one-month period to 30th November 2022, major equity markets, as measured by the
aggregate FTSE All – World Index, rose by over 5%, reducing the year-to-date loss to 18%, in $ terms.
Chinese equities, were very strong gaining over 30% and taking the broad emerging market indices
and Asia with them. The VIX index fell, finishing the period at a level of 22.22.
Government Fixed Interest stocks also rose over the month. The UK 10-year gilt ended the month on
a yield of 3.16% with corresponding yields of 3.77%, 1.94% and 0.25% in USA, Germany, and Japan
respectively. Speculative and lower quality bonds, however,fell in price terms. Currency moves
featured a weaker US dollar. Commodities were mixed.

News

Over the recent month, the OECD has made further downgrades to world economic growth and
anecdotal evidence from several third quarter reporting companies suggests that the slowdown is
accelerating. e.g. Maersk (“freight rates peaked….decreasing demand”).
At the same time, key data indicators (factory gate and commodity prices, shipping rates, inflation
expectations) suggest that headline price growth is set to slow in coming months, although labour
compensation developments must be watched carefully .
More volatility expected in oil prices as western countries prepare to impose a price cap on Russian
crude.
FTX,a leading crypto exchange,and a sprawling network of affiliated firms filed for bankruptcy
protection dealing another blow to the crypto sector.

Recent US Federal Reserve meetings and informal comments by Jerome Powell and other Fed
governors remain hawkish and further increases are expected though calls for 50bp rather than
75bp are increasing. The latest rise took the benchmark rate to the 3.75%/4% range.At a speech at
the Brookings Institute yesterday,the Fed Chairman sent mixed signals that the fight against
inflation “had a long way to go” while also sending a strong hint that the next rate rise,mid
December, would be 50bp rather than 75bp
would be Downward projections to economic growth, and upward moves to inflation forecasts
were also released.
Recently announced inflation indicators showed October headline CPI of 7.7%, lower than estimates,
while the core inflation rate rose by 6.3%. First quarter negative GDP growth followed by second
quarter of -0.9% signals a “technical recession”, although labour/employment trends still seem
reasonably robust. Third quarter preliminary GDP growth of 2.6%, annualised, while higher than

estimates concealed a weaker consumer component offset by a strong trade balance. Recent
consumer sentiment indicators (November composite PMI for example), retail sales, housing
activity, construction figures and the Empire States Survey back this up, showing declining trends
into recent weeks. . The Fed’s own forecasts expect GDP growth of 0.2% and 1.2%, and core PCE
growth of 4.5% and 3.1% respectively for 2022 and 2023
US midterm election results showed the Republicans narrowly taking control of the House of
Representatives while the Democrats retained the Senate, a situation which could minimise more
extreme policies, but also thwart some of Biden’s ambitions. Donald Trump has vowed to return in
2024, although the Republican Party is far from united at the current time

EUROPE

The European Central Bank raised interest rates by half a percentage point on July 22nd, and a further
75bp in September also pledging to support surging borrowing costs from sparking a eurozone debt
crisis. The ECB raised interest rates by another 75bp, to their highest level since 2009, on 27th
October, pledging to continue increasing borrowing costs in the coming months to tackle record
inflation, despite a looming recession. On 29th November, Christine Lagarde, the ECB president,
warned that the bank was “not done” raising interest rates, saying that inflation “still has a way to
go”.
First quarter 2022 GDP for the Eurozone showed a weaker than expected trend especially in
Sweden, Italy and Germany and more recent indicators show a continuation of this trend,
exacerbated by the Russia/Ukraine conflict, supply chain issues, and rapidly increasing costs. The
“flash” PMI figure for October, released on the24th October, fell to 47.1 the lowest since November
2020, although German quarterly GDP growth figures, just released, were marginally ahead of
expectations.
Current ECB staff projections foresee economic growth of 2.8% for 2022, a sharp reduction on the
previous forecast, and further downgrades could be likely in the wake of the ongoing Ukrainian
conflict and related gas shortages.
November Eurozone inflation, just released, of 10.0% was lower than expected.with slower gains in
energy and services ,and faster growth in food prices.

ASIA excl JAPAN

The GDP figures, shown below (source: CLSA, CEIC) show that 2022 and 2023 growth
projections for the Asia excl Japan region compare favourably with those of other developed
regions. The reasons include a “better” Covid experience, selective commodity exposure,
tourism, continued FDI Investment (especially China related) and better initial fiscal
situations (compared with late 90’s for example) and limited direct connections with the
Russia/Ukraine situation. The forecasts do not assume a total easing of Chinese covid rules.
Headline inflation of around 5% (core 3%) also compares favourably.
Geo-political concerns must be taken into account, especially In Taiwan.

CHINA

The 5.5% official GDP growth target for 2022 looks clearly unachievable, with some investment
banks now forecasting below 3%. Official data shows weakening trends in consumer spending, fixed
asset investment and construction activity while more recent “live” tracking data e.g., mobility,
cement production and electricity use also showed subdued economic activity. Official data for the
third quarter, just released shows growth of 3.9%. The major historic negative issues of a very
restrictive anti-Covid policy and major disruption within the property market have now been
supplemented by increasing US restrictions on the production/export of certain key electronic
products.
At the time of writing a property “rescue” package has been implemented, while on the Covid front,
tens of thousands of people have taken to the streets protesting strict coronavirus controls and
suppression of freedom of speech, triggering clashes with police and security forces.While nothing is
certain in Xi’s approach to the Covid Pandemic, there is a growing feeling that certain measures will
be relaxed/increase in vaccination.

JAPAN

The Japanese economy contracted 1.2% on an annualized basis during the third quarter of 2022,
missing forecasts of 1.1% growth, and considerably weaker than the 4.6% expansion recorded during
the second quarter. This was the first down quarter of the year reflecting weak domestic
consumption, a slowdown in business investment and an acceleration in imports. Estimates for the
full year seem to fall mainly within the 1.5%-2.0% band. Inflation, while still well below international
peers, rose by 3.6% in October, the highest since 1982, driven by currency weakness.
Recently the Japanese government unveiled a $197 billion stimulus package to ease the impact on
consumers of soaring commodity prices and a falling yen, while the BoJ stuck by its ultra-loose
policy, maintaining very low interest rates and re-affirming it yield control policy.

UNITED KINGDOM

Within the UK, live activity data (e.g November Gfk data) continues to show a weaker overall trend,
especially within the services sector. According to this survey, released late November, covering the
mid November period, consumer confidence remains very low, amid the cost-of-living crisis.The

retail sales figure for October did however show a slightly better than expected reading but this may
have been distorted by the Queen’s mourning period . Unemployment, however, is still at a very
low level, although recent official figures did show a tentative slowing in hiring intentions.
Inflation continues to rise, the October CPI and RPI readings registering hikes of 11.1% and 14.2%
respectively. Kantar and the ONS both reported food/grocery prices rising about 15% year on year as
well as turkey/egg shortages.Happy Christmas!
The PSBR was starting to deteriorate again, largely as a results of rapidly rising interest (index linked)
payments and expectations of higher public sector pay and state pensions. The most recent “official”
figure showed September PSNB at £20 billion, much larger than forecast and the second largest
since monthly records began in 1993, according to the ONS.

Despite some relief with the recent energy price package, until April at least, (but not other utilitiessee below), shop price inflation, greater Council Tax “freedom”, upward interest/mortgage rate
pressure, stalling house prices, accelerating rents, insolvencies/evictions, legacy Brexit issues and ,
strike activity, will continue to be headwinds and the outlook for economic growth over coming
quarters is highly uncertain. Both the Bank of England as well as the OBR and now the OECD are
expecting recessionary conditions for one to two years.

Experts at consultancy EY-Parthenon reported that company profit warnings had jumped from 51 to
over 86 over the third quarter of 2022 citing increasing costs and overheads as the main reason,
especially in consumer facing businesses. Another report from Begbies Traynor, Latest Red Flag Alert

Report for Q3 2022 – 07:00:07 19 Oct 2022 – BEG News article | London Stock Exchange quoted that
over 600,000 business were already in severe financial distress.
Monetary policy has tightened from a 0.1% interest rate in December last year to the 1.25% rate set
in June and a further 50bp at the August, meeting, followed by 50bp in September, taking the
benchmark rate to 2.25%. Markets are expecting rates to be above 4.0% by mid-2023.

Autumn Statement
On 17th November, Chancellor Hunt told a sombre House of Commons that a massive fiscal
consolidation including £30 billion of spending cuts and £25 billion of tax rises was needed to restore
Britain’s credibility and tame inflation. The OBR said they expected the economy to shrink 1.4% and
not regain pre -pandemic levels until 2024.Inflation was expected to remain over 7% next year.
While many of the proposals had been leaked, and the market reaction was muted (first objective
achieved!), there were a few positive surprises (e.g help for NHS and education) and several
negatives.
From an investor point of view the reduction in tax free allowances for investment income and
capital gains, was higher than expected. Make full use of ISA etc while can!

Monthly Review of Markets
Equities
Global Equities rose over November (+5.02%) extending the quarterly recovery and reducing the
year to date decline to 18.04% in dollar terms. All major indices climbed with especially large gains
registered in China, which also benefited Emerging Market and FT Asia-excl Japan bourses.

Continental European indices were also relatively strong, while the NASDAQ and Nikkei lagged in
relative terms. The VIX index fell over the month to end November at a level of 22.22. The ten –
month gain of 29.04% reflects the degree of risk aversion compared with the” relative calm” of last
December (medical, geo-political and economic!)

UK Sectors
Sector moves were again very mixed over the month although most ended in positive territory. The
few losers included telco’s and tobacco On the other hand, miners, utilities, life companies,
financials,retailers and food were relatively strong. The FTSE100 outperformed the All-Share Index
and is about 3% ahead of the broader index since the beginning of the year. By IA sectors, UK active
unit trusts are underperforming benchmark indices, trackers etc, so far this year, with small
company funds even more so. Income based funds, by contrast, are significantly outperforming the
averages. “Balanced” funds, by IA definitions, are falling by about 8%-10% so far this year (Source:
Trustnet November 30th).

Fixed Interest
Major global government bonds rose in price terms over November, the UK 10-year yield for
instance finishing the month at a yield of 3.16%. Other ten-year government bond yields showed
closing month yields of 3.77%,1.93% and 0.25% for US, German and Japanese debt respectively. UK
corporate bonds also bounced strongly, up approximately 4% on the month in price terms.
Speculative bonds, however, bucked the trend falling in price terms.
Year to date, the composite gilt index has fallen approximately 22% underperforming UK higher
quality corporate bonds in price terms and more so in total return.
Check my recommendations in preference shares, selected corporate bonds,fixed interest ETF’s ,
zero-coupons, speculative high yield etc. A list of my top ideas from over 10 different asset classes
is also available to subscribers.

Foreign Exchange
Currency moves featured a sharp fall in the US dollar, largely following the better-than-expected
inflation rate. Sterling rose against the US dollar but fell against the Japanese Yen and Euro. Currency
developments during November also included modest strength in the Chinese Yuan.

Commodities
A mixed performance by commodities during November with weakness in Oil and many agricultural
commodities and strength in copper, Iron ore and the precious metals. Year to date, uranium and
the energy complex are strongly up in price terms while industrial metals copper, aluminium and
iron have all shown price declines of over 13%. Gold has also dropped in dollar terms by about 3% so
far this year.

Looking Forward
Major central banks have remained hawkish with reducing QE/commencing QT and accelerating the
timing and extents of rate increases as the main objectives, especially where inflation control is the
sole mandate. In a growing number of smaller economies where US contagion, politics, commodity
exposure inflation/fx are also issues, several official increase rate increases have already taken
effect. Japan, however, has continued to adopt stimulative measures, up to now.
Global Government Bonds have stabilised somewhat although differing inflationary outlooks and
supply concerns could lead to continued volatility in the sector.
For equities, the two medium term key questions will be when rising interest rates eventually cause
equity derating/fund flow switches, government, corporate and household problems, and how the
rate of corporate earnings growth develops after the initial snapback. Going forward, withdrawal of
certain pandemic supports, uncertain consumer and corporate behaviour and cost pressures are
likely to lead to great variations by sector and individual company. The third quarter reporting
season produced several negative surprises e.g large American technology companies and UK
building and property companies.

Observations/Thoughts
ASSET ALLOCATION
As well as maintaining an overweight position in UK equities, it may be worth initiating or adding to
Japanese positions within an international portfolio. The US market has fallen about 19% so far this
year (NASDAQ -30%) but remains a relative underweight in my view. Margin pressure headwinds,
political uncertainty, prospective dollar weakness and technology sector volatility must be balanced
against the current stock market ratings. Continental European equities appear cheaply rated in
aggregate, but great selectivity is required. Within the Emerging market space I currently favour
exposure to the Far East.

Another major asset allocation decision would be to keep part of the conventional “fixed interest”
portion in alternative income plays in the infrastructure, renewables, and specialist property
areas. Many instruments in this area provide superior capital growth, income, and lower volatility
than gilts for example. Recent stock market volatility has brought several renewable stocks back to
attractive levels.
I am also adding selected preference shares to the “fixed interest” allocation, where annual yields
of approximately 6% are currently available.

UK Equities continue to remain a relative overweight in my view, based on several
conventional investment metrics (see above), longer term underperformance since the
Brexit vote, style preference (value overgrowth) and international resource exposure
although be aware of the numerous domestic headwinds I have highlighted above.
Value should be favoured over growth, and the FTSE 100 favoured over the FT All-Share.
Apart from the style drift, remember that the non sterling element of leading FTSE 100
companies and sectors is relatively high
By sector, Oil and Mining equities continue to benefit from above average yields, strong
balance sheets, dollar exposure and secular demand e.g copper, cobalt for electronics,
construction, electric vehicles etc. Any moves regarding Chinese re-opening the economy
would be another positive for this sector.
Remain overweight in pharmaceuticals and underweight in non-renewable utility stocks
which may suffer from consumer and government pressures, and no longer trade on yield
premia, especially against the backdrop of higher gilt yields.
Construction materials, especially cement will benefit from growing
infrastructure/renewable initiatives., although rising cost pressures and falling housing
activity must also be considered.
Banks, may enjoy some relative strength from rising interest rates, but continue to
monitor the recession/loan growth and default risks.These mixed trends were very
evident in the recent third quarter figures. Preference Shares as well as ordinary shares
have attractions in this area
Housebuilders and real estate-expect depressed activity and remember that the rising
interest rates have not yet been fully factored into bricks and mortar property yields.
Industry data and anecdotal news from both housebuilders and REIT’s suggest further
weakness to come.

Retailers are in general suffering from a combination of falling sales and rising costs and
clear trends in consumers “trading down” are apparent. Certain on-line operations e.g
Asos additionally are suffering from an element of post-Covid comparison.
Domestic Breweries/pubs etc are having a hard time with stalling consumer’s
expenditure, supermarket competition and rapidly rising costs.
Airlines may suffer as a result of large dollar costs, uncertain foreign travel outlook and
often high debt levels
Extra due diligence at stock level more generally will be required as I expect a growing
number of profit warnings and downbeat forward looking statements. See the EY and
Begbies statements on page 7 above.
However,takeover activity is also clearly increasing with, for example, private equity
snapping up UK-listed companies at the fastest pace for more than twenty years. Foreign
takeover, stake building is also increasing, current weak sterling being a factor, with
Vodafone under scrutiny by a French (who already have BT interest!) investor. Biffa (waste
management),MicroFocus(technology),Aveva(software) and RPS(professional services)
have all succumbed to foreign takeovers in recent months, much by “strong dollar”
American or Canadian organizations.

JAPANESE EQUITIES also remain an overweight in my view, although my recent
comment re hedging may “nuanced “now following the extreme currency weakness and
surprise intervention. Unlike most other major economies, Japan is expected to continue
its easy money policy. Exporters have benefitted from the plunging Yen although higher
input costs and more “off-shoring” also must be considered. The prospective price/book
ratio of 1.19 is attracting interest of corporate and private equity buyers, while the
prospective yield of 2.6% is above the world average and compares very favourably with
USA (1.7%). Corporate governance is rapidly improving with diverse boards, reduction of
cross holding, higher dividends etc. There are clear signs that inward investment attracted
by the pro-growth, pro-deregulation agenda and relatively low costs (average Japanese
annual wage $30000 compared with $75000 USA) is increasing. Private equity stake
building interest in Toshiba and growing activity in the property sector (discount on a
discount in a cheap currency) demonstrate the search for value in Japan. Investors may
wish to adopt a partially rather than fully hedged FX position following recent
developments
On a valuation basis (see table above) the forward PE multiple of 12.9 is at a considerable
discount to the world, and especially US average (18.0)

pressures. Six countries have already defaulted during the pandemic, and the IMF is currently
in various stages of bail-out discussions with Pakistan,Argentina,Zambia,Sri
Lanka,Ghana,Tunisia and Egypt.
Within the emerging/frontier universe I continue to have a relatively positive view on Asia.
The economic fundamentals were discussed on page 16 above, and the forward-looking
multiples and dividend growth metrics appear relatively attractive in a global context. Any
move by China to open more fully after their severe Covid lockdown, would of course
additionally help. Exposure to the entire area can be achieved through a number of ETF’s and
also investment trusts currently on discounts
If a country-by-country approach is adopted, I have a longer term positive view on Vietnam
where, the nation is supported by positive demographics, with a population of near 100
million, an emerging middle class, and a recipient of strong foreign direct investment.
Qualconn,an Apple supplier, Intel(semi-conductors),Lego and Samsung(mobile phone plant)
have all recently invested in new capacity in the country. Other big names moving chunks of
production from China to Vietnam include Dell and HP (laptops), Google(phones)and
Microsoft (Games Consoles) The economy is expected to grow at around 6.5% this year (7.7%
Q2 2022) and current inflation is running at about 3.5%. On a relatively low prospective PE
based on forecast earnings growth over 20%, Vietnamese equities appear good value. India,
although quite highly rated and a major oil importer, warrants inclusion in a diversified
portfolio, and is currently receiving some fund flows from “overweight” Chinese portfolios.
Indonesia, the last of my current Asian ideas benefits from a commodity boom, strong
domestic market, low debt, relatively stable currency, forecast 5% GDP growth and 5%
inflation

Caution is required in many South American markets with poor COVID-19 situations,
deteriorating fiscal balances, weak investment, low productivity (see below) and
governments in a state of transitioning e.g Brazil. However, some stock market
valuations currently appear interesting in the region, which, so far, has been relatively
unaffected by events in Ukraine. Commodity exposure, deglobalization beneficiary,
valuation and recovery from a very low-level account for some year-to-date stock
market relative out- performance. Many of these countries also raised interest rates
at an earlier stage, allowing relative currency strength, compared with say the Euro,Yen or Sterling.

Certain areas within Central Europe are starting to receive more attention, mainly on
valuation grounds, but the lingering Covid effects and indir
ect effects of the Russia/Ukraine invasion should be borne into account. Regarding the
latter, a reduction/termination of Russian gas supply could have a serious recessionary
impact in certain countries. Large refugee influxes e.g Poland are also starting to
create budgetary/social issues.

Comments re great selectivity above also apply to emerging market debt. For the
more adventurous fixed interest investor combinations of well above average yields
(sometimes caused by pre-emptive moves last year), stable fiscal and FX situations
and, diversified economic models could provide outperformance from carefully
selected bonds.

• COMMODITIES– Gold spiked to over $2000 in March, a recent high, when Russia invaded
Ukraine, but has since fallen about 12%, although of course, remaining reasonably stable in
many local currency terms . The longer-term prospects for more cyclical plays continue to
look brighter. Increased renewable initiatives, greater infrastructure spending as well as
general growth, especially from Asia, are likely to keep selected commodities in demand at
the same time as certain supply constraints (weather, labour and equipment shortages,
Covid, transport) are biting. Anecdotal evidence from reporting companies RTZ, BHP and
Anglo American appear to suggest that the industry is enjoying a bumper time, and with
disciplined capex programmes, extra dividends and share buy-backs are commonplace!
Current rumours of a cautious relaxation of the Chinese Covid policy, may provide a boost to
base metals.
• Wheat and other grain prices have fallen from the levels reached following the Russian
invasion of Ukraine, but the current grain shipment complications, planting/harvesting
schedules within the region and extreme global meteorological conditions are expected to
lead to further price volatility. If the conflict is prolonged it will affect millions of people
living in such places as Egypt, Libya, Lebanon Tunisia, Morocco, Pakistan and Indonesia that
could have political consequences. There has been renewed interest in agricultural funds as
well as the soft commodities themselves.

my view, combining well above average yields and low market correlation with low
premium to asset value. The recent volatility in natural gas prices has highlighted both
risks and opportunities in the production and storage of energy from alternative
sources. However, increasing levels of due diligence are required, in committing new
money to the area overall. Financial watchdogs across the world are sharpening their
scrutiny of potential “greenwashing” in the investment industry on rising concerns that
capital is being deployed on misleading claims.
• However, in the shorter term, the Russian invasion of Ukraine has precipitated a global
energy crisis, that has forced countries, especially in Europe to look for ways to quickly
wean themselves off Russian oil and gas, and reconsider timelines of commitments to
cut the use of fossil fuels. At the time of writing, it seems highly likely that USA will
increase oil and gas output, UK North Sea may see further investment and EU coal
consumption could increase.
• Another area currently in the ESG purist cross hairs is “nuclear”. Ignoring the fact that
nuclear weapons have not been used in anger since 1945, and the fact that some deterrent is
needed, (now?), where should the confused investor stand when it comes to nuclear power
substituting coal power? Japan, UK and Germany are all studying proposals to revive their
nuclear power capacities. I have some interesting “uranium play” ideas for those interested.

• ALTERNATIVE ASSETS-this group, encompassing private equity, private debt, hedge
funds, real estate, infrastructure, and natural resources is expected to continue growing both
in actual and relative terms over coming years.
Traditional asset management groups are racing to expand offerings in alternative
investments as they seek to boost profitability and head off competition from private
equity groups (see graph below).
I have, for a while, recommended some exposure to this area maybe as part of the
former “gilt allocation”. With strong caveats re liquidity, transparency, dealing
process, I still adopt this stance, continuing to use the investment trust route. So far
this year, gilts have declined approximately 24% while my favoured UK renewable
closed-end funds have appreciated by around 6% in capital terms and delivered about
6% in annual income. Please contact me directly for specific ideas

COMMERCIAL PROPERTY The MSCI/IPD Property Index showed a sharp fall in the total return across all
properties in October, the decline of 6.4% (-6.8% capital values, +0.4% income),taking
the year to date return to -1.6% (capital -5.2%,Income +3.8%).The monthly decline
accelerated the downward trend started in July this year, especially in Industrial
Properties. Rental growth however was positive at +2.4% in October..or 4.4%
annualised for the ten month period
Several analysts are down grading their estimates for the sector following the rapid move
in UK longer and shorter-term interest rates. Property asset valuations take time to
materialise where there is a lag between balance sheet date and results publication in
the listed area. Live traded property corporate bonds, however, have already moved
sharply lower.
Quoted property giants British Land and Land Securities both reported deteriorating
conditions witing their third quarter statements, expecting further valuation declines
following rising yields.

Full asset allocation and stock selection ideas if needed for ISA/dealing accounts, pensions.
Ideas for a ten stock FTSE portfolio. Stock/pooled fund lists for income, cautious or growth
portfolios are available. Hedging ideas, and a list of shorter-term low risk/ high risk ideas
can also be purchased.
I also undertake bespoke portfolio construction/restructuring and analysis of legacy
portfolios.
Independence from any product provider and transparent charging structure
Feel free to contact regarding any investment project.
Good luck with performance!
Ken Baksh Bsc,Fellow (UK Society of Investment Professionals)
kenbaksh@btopenworld.com

1st December ,2022
Important Note: This article is not an investment recommendation and should
not be relied upon when making investment decisions – investors should conduct
their own comprehensive research. Please read the disclaimer.
Disclaimer: Opinions expressed herein by the author are not an investment
recommendation and are not meant to be relied upon in investment decisions.
The author is not acting in an investment, tax, legal or any other advisory
capacity. This is not an investment research report. The author’s opinions
expressed herein address only select aspects of potential investment in
securities of the companies mentioned and cannot be a substitute for
comprehensive investment analysis. Any analysis presented herein is illustrative
in nature, limited in scope, based on an incomplete set of information, and has
limitations to its accuracy. The author recommends that potential and existing
investors conduct thorough investment research of their own, including detailed
review of the companies’ regulatory filings, and consult a qualified investment
advisor. The information upon which this material is based was obtained from
sources believed to be reliable but has not been independently verified.
Therefore, the author cannot guarantee its accuracy. Any opinions or estimates
constitute the author’s best judgment as of the date of publication and are
subject to change without notice.The author may hold positions in any of the
securities mentioned
The author explicitly disclaims any liability that may arise from the use of this
material.

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