The turbulent political backdrop of the turn of the year has given way to stormy markets as the potential for recovery begins to be ‘priced-in’ to bond markets, steepening yield curves and lifting inflation expectations.

The long end of the bond markets has seen the biggest shifts; the US 30-year yield rising to 2.32% from 1.8% four weeks ago (1.6% at the turn of the year), and the UK 30-year gilt yield jumping to 1.47% from 0.83%, which translates to a 17.5% fall in the capital value of the 30-year gilt so far this year…

With central banks firmly holding the line on short-term rates (Fed Governor Powell stating yesterday: “we are a long way from our employment and inflation goals”), yield curves are steepening. The ‘reflation trade’ is back on in equity markets (switching to ‘value’ from ‘growth’) and we have seen spikes in equity market volatility, particularly in the NASDAQ. Questions are also being asked as to the valuation basis for many of the more high-flying (though not yet profitable) stocks that have been the subject of much hype over the past few months.

We have not undertaken any major shift in the overall asset allocation of the Fund over the period. Our Fixed Interest exposure is down a shade at 35%, this area is being impacted by the sell-off in bond markets, but it is largely invested in short-dated debt where the impact is much lower. Taking into account our floating rate note exposure (close to 33% of the portfolio), the average maturity is around 6.5 years and the overall duration is 2.7. The table, right, shows the overall asset mix today.

The majority of the transactions over this period have taken place in the equity markets though this is not obvious from the overall equity exposure, which is unchanged. The sharp recovery in smaller companies gave us an opportunity to reduce exposure and we have sold down or reduced a number of holdings, including Arix Bioscience and Sensyne Health, which had both performed well since the autumn. We have also continued to reduce international equity exposure, which has done well, but is exposed to the strength in sterling. We have been adding to some UK big cap names where we think there is now significant value to be found, including AstraZeneca, Smith & Nephew and Unilever.

We have also been adding to our UK bank exposure, notably Barclays. The combination of an improving economic background with a steepening yield curve is good news for the banks, which have also been reporting improving capital ratios. The contrast between the UK banks trading at valuations of 50%/60% of their book value with US counterparts, many of which trade on 150%/160% of book value, is stark.

The property sector is throwing-up some opportunities. Tritax Eurobox, which has a collection of large-scale logistics warehouses in Europe, reported 100% rent collection (something of a rarity in property markets at present) and the sale of a Polish asset over book value. The rise in their stock price gave us an opportunity to take some profit; the later announcement of a rights issue and capital raise opens the possibility of reinstating the full holding. Elsewhere, we have been adding to our holding in Land Securities Group.

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