As 2021 draws to a close, we are making all sorts of records.
US inflation is running at almost 7%, UK and European just over 5% (pesky UK RPI inflation running at 7.1%) while ten-year bond yields range from minus 0.4% for the Bund, 0.75% for the Gilt to 1.25% for US Treasuries. I don’t recall seeing that in any predictions, unsurprisingly, it feels that many fingers have been burnt. Yield curves are also very shallow for a world economy that is forecast to boom next year. Clearly something has to give, we can’t maintain that level of negative real returns for too long.
I am hostage to fortune writing just before the Federal Reserve speaks and the Bank of England and ECB pronouncements tomorrow, but, for what it’s worth… Central banks almost have to lift base interest rates/curb their bond buying soon or they will be stuck unable to react to future problems with looser conditions. As we have said many times, emergency measures have done their job, time to move on. But fighting the long end of the US Treasury market is not a sensible plan and we would agree that the ‘terminal rate’ for longer-dated bonds is lower this time around. We see inflation easing next year, but not quite as much as the CBs might wish, and short rates moving higher, expecting the whole yield curve to rise but remain quite flat.
The risk remains in long duration bonds where the pricing looks completely wrong (but may stay that way for some while). We have continued to build-up our floating rate book and have reduced the overall duration of our bond holdings to 2.3. Reflecting the risk/reward that we see at present (not v. inspiring!), the current asset mix of the Fund is shown on the right.
Within the Fund, we have extended our exposure to CIBC (Canadian Imperial Bank of Commerce), selling their 2022 sterling FRN issue and buying their new December 2025 issue, we also added a new FRN issue from DBS Bank, due in November 2025, all being AAA-rated notes. Within fixed interest, there were a series of relatively small transactions, the most significant being the sale of one of the Aviva hybrid issues that we held. (Coincidentally) we acquired two new ‘green’ bond issues, one from NatWest Group and one from Berkeley Group, but, overall, exposure was lowered again.
The sale of two of our zero dividend preference holdings (no longer offering attractive returns), has reduced this area to just 2.5% of the portfolio and is unlikely to increase as there is no new issuance at present (interesting new issuance anyway). Within infrastructure, we took a new issue in Harmony Energy, which is developing battery storage facilities for renewable power, energy storage and efficiency now represents half of this sector. We took some profits from BBGI International and Gresham Energy Storage to fund the Harmony purchase. In the property area, we added a shade to the holding in Shaftesbury as the stock came off again with the omicron news, similarly among the equity holdings we added to Heineken and to Smith & Nephew.
P.S. I have nothing medically robust to say about omicron, simply the observation that it appears to be spreading like wildfire, anecdotally this certainly appears to be the case in London, and I suspect that the official figures are seriously understating the actual cases. To put a positive spin on this, the peak should arrive much more quickly this time and, here’s hoping, if it remains less virulent than those earlier strains, we could just be reaching some sort of end game at last. Happy Christmas.
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