December was volatile but the New Year has taken this to the next level as bond yields jumped again and equity markets took fright, notably the NASDAQ. The year started with yet more poor inflation figures and multiple comments from the Federal Reserve of “we really mean it”, as yields rose the stock markets switched from six months of hammering non-profitable tech to a much broader sell-off that dragged in big (profitable) tech. A warning from Netflix (not one that we hold) of slowing subscriber growth provided a further spur and a 40% fall in their stock price to start the year.

Bond markets sank, in America, the ten-year yield has risen to 1.8% while, in Germany, the ten-year Bund briefly made it back to a positive yield for the first time since early 2019. Market expectations for moves by the Federal Reserve have moved on, four increases over the year are now being discussed widely. We still expect to see inflation easing next year, but not as much as central banks might wish. The Bank of England raised base rates in December, our best guess is for them to raise again in February (to 0.5%), a level that would allow them to stop re-investing the proceeds of maturing Gilts.

Rising tensions in Ukraine are only adding to the febrile conditions in markets. We have nothing useful to add to the analysis of what President Putin may or may not be up to, only to observe that with this much notice (round 1 was in March 2014), Russia must expect to pay a high price for an actual invasion. Of course, this is also having an impact on the price of oil, more inflation pressures…

The reaction in equity markets has been rough for ‘growth’ companies, notably in the tech sectors, while ‘value’ sectors, particularly oil companies, have rallied hard. From the start of the year the NASDAQ has fallen 15% while the S&P 500 has seen a 10% move. As above, NASDAQ has been ‘re-pricing’ many of the ‘non-profitable’ tech stocks over the past year with a Goldman Sachs index of these having halved over the past twelve months. What has changed this year is the shift to the profitable companies, Alphabet, Amazon, Apple and Microsoft having all been knocked back, despite releasing further good figures.

The Esk Fund has certainly not been immune to these moves in the growth companies that we favour and the unit price has fallen. With the volatility in markets, we have been more active than usual in the Fund, two holdings have gone from the portfolio in their entirety and three new holdings have been introduced. Gone are the holdings in Tritax Eurobox, the European logistics warehouse company, which had done well but appeared to be fully priced, and in the Japanese company M3 Inc., whose figures were no longer justifying their rating.

Through December and January we have been building a holding in the German company Sartorius, which makes precision electronic equipment and components for laboratory and industrial uses and controls the French company Sartorius Stedim Biotech, which develops laboratory equipment for the pharma and food industries. Over the same period we have been acquiring a holding in the (rather better known) Swiss company, Logitech International, which makes equipment for use with personal computers. The last of the new holdings was an initial purchase of the Japanese company, Chugai Pharmaceutical, which specialises in cancer and blood disorders, Chugai work in partnership with Roche Holding, which is their principal shareholder.

Other changes to the portfolio were a 25% reduction in the holding in Intuit, which has been an excellent investment, with hindsight, we should have sold more, but we do still like this company for the long term. We added to the holding in GN Store Nord again and also made small additions to Oracle, Nidec and, most recently, to Amazon as prices crumbled.

It is not clear when the current sell-off will end, but there is a whiff of capitulation in the air, along with some pain. Here is the current international disposition of the Fund – see chart, right.

The above article has been prepared for investment professionals. Any other readers should note this content does not constitute advice or a solicitation to buy, sell, or hold any investment. We strongly recommend speaking to an investment adviser before taking any action based on the information contained in this article.

Please also note the value of investments and the income you get from them may fall as well as rise, and there is no certainty that you will get back the amount of your original investment. You should also be aware that past performance may not be a reliable guide to future performance.