Our mid-June report on activity in Tenax coincided with shocking US inflation figures, exceeding the worst expectations, triggering a rout in bond markets and driving equities to new lows for the year.
In contrast, today we have had shocking UK inflation stats (the worst since 1982), taking the CPI over 10% (best not to look at the RPI). This data following some slightly better-than-expected US inflation stats for July.
But the rally from the June lows for equity markets (and highs for ten-year bond yields) has been impressive, the S&P 500 has recouped more than 50% of the year’s fall, triggering a round of ‘short covering’. The NASDAQ has also put in a strong recovery aided by quarterly reports from the likes of Apple and Amazon.Com. UK headline indices, having out-performed over the first half, are now lagging as the sell-off in crude oil and metals prices has depressed the big oil and mining stocks. There has been a similar pattern in UK credit spreads, which reached their widest point at the end of June but have since been improving.
The trading pattern within the Fund has largely followed the flow of the first six months. We have gradually been adding to credit, where we see plenty of opportunities, and to other ‘risk assets’ while reducing our ‘near cash’ exposure, see chart right.
Looking down the asset classes, the Floating Rate Note exposure is now down to 32%, we are likely to pause around here. Yields are moving up nicely with the increase in base rates, the book now has a yield of 2.2% and rising. We expect the Bank to keep moving the Base Rate up, a further 50bp to 2.25% in September looks likely, so expect a further increase in the yield we are seeing.
In credit (Fixed Interest), we have continued to add to positions, while not increasing duration. The redemption yield on this portion of the Fund is currently 4.9% with a duration of 4.1 (the overall duration including the FRN book is 2.3). The UK ten-year gilt yield that reached a high of 2.7% in late June, came all the way back to 1.8% by late July but is now moving back up with those inflation figures to the current 2.3%. But the yield curve is inverted with one and two-year Gilt yields higher than the ten-year.
The new issue market for credit has been very quiet, though August always sees a lull, we expect this to pick up again in the autumn as there is appetite for good quality issues. We have seen opportunities in the secondary market though and have been adding to investment grade issues at yields of 6% and more (at the short-dated end). We have sold the bulk of our US dollar denominated holdings, feeling that the relentless rise of the dollar (20% up from the lows of June last year) maybe be close to a turning point.
Infrastructure has continued to provide decent returns for us, most notably from the energy storage and efficiency companies, which make up the greatest part of our exposure now. We sold more of the holding in International Public Partnerships but have been building-up the holding in Harmony Energy, partly at the expense of Gresham House Energy Storage, which have performed well but whose valuation is looking a shade stretched.
We have not made any changes to the Convertible holdings though these have benefitted from the improving equity and credit markets. We have reduced the Zero Dividend Preference holdings again and fully expect this to be on-going as there is no new issuance in this area of a quality for us to consider. Equity exposure had been increasing but, more recently, we have begun to edge this back again feeling that a ‘pause to refresh’ is due after the past six weeks of gains. The most notable sale has been the holding in Smith & Nephew whose recent figures disappointed again.
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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.