The first quarter of 2022 played-out as a series of macro shocks, followed by a more constructive last few weeks.
By a wide margin, it was the oil & gas and mining businesses (BP, Shell, Anglo American, Rio Tinto, etc) that led the market as events in Ukraine sent oil and other commodity prices soaring in an already difficult environment for inflation. At the other extreme, a long list of higher growth businesses fell sharply at the prospect of higher interest rates. The market sell-off bottomed in the second week of March, after which, stock prices began to regain some momentum and the market to find its feet.
The Bank of England increased the Base Rate twice more to three quarters of one per cent. We expect them to continue to raise rates over the course of the year in a ‘better late than never’ attempt to curtail inflation. We wonder how far the Bank is going to be able to raise the Base Rate against a backdrop of rising food and energy bills and the increase in National Insurance contributions, which are bound to have a dampening effect on the economy. We expect to see peak figures for inflation over the next two months, then a gradual easing back.
Corporate earnings estimates have continued to move ahead over the quarter, though it would be surprising if this did not slow now with the uncertainty in markets. With the fall in so many share prices this does mean that the valuations of a number of companies’ shares are rather more attractive now. Dividend payments are also improving though, overall, they are still some way behind December 2019 levels.
The disposition of investments in the Balanced Equity Income portfolio is not significantly changed from the end of the year, with major UK companies dominant, see chart, right.
The dividend income from the portfolio has improved further, the payment due at the end of May will be around 15% higher than last year’s. Not yet back to the peak levels of 2019 but moving in the right direction.
We sold the last of the holding in BHP Group in January as they moved their domicile to Australia and ceased to be a UK company. We have gradually been selling down the holding in Compass Group, which has recovered well from the 2020 slump, but meaningful dividend growth is a distant prospect. A new addition to the portfolio is 3i Group (originally Investors in Industry, established in 1945 becoming a public company in 1994). Otherwise, we added modestly to a number of existing holdings during the quarter as prices succumbed, including: Close Brothers, D S Smith, Diageo, Kingfisher, Schroders and Unilever.
The portfolio has benefited from its positions in AstraZeneca and GlaxoSmithkline, both of which have gained this quarter, most notably the former. Also of particular note is the holding in BAE Systems, which, unsurprisingly, has had a strong quarter and now appears in the top holdings. RELX moves further up the list after reassuring figures. Detracting from performance has been Barclays, which has dropped right out of this list, along with Sage Group and Greggs, which have also suffered (of course, not owning Shell has also been a hindrance this quarter). Bunzl continues to do well and now appears in this list, along with the re-appearance of Rio Tinto.