This four-week period has seen a sharp setback for equities, particularly in American stocks, the NASDAQ has fallen 15% and the MSCI World by 11%, accompanied by a big jump in volatility. But it has not just been equity markets, rather more of an ‘all fall down’ period as bond markets also sank in the wake of the Federal Reserve’s lifting of rates to 1% and notice of further to come as the year progresses. Even the commodity markets turned off, led by a 10% fall in the price of copper, though oil held steady. 

The US ten-year yield jumped to 3.1% and the UK ten-year to 2.1%, including a quite satisfactory period when the German ten-year hit 1%, the UK 2% and US 3%. The bond markets have tempered the moves over the past week or so as the mood shifted towards the realisation that growth was becoming a problem, taking rates down again. Chinese lockdowns and apparent stagflation in the UK and Europe do not make the job of the central banks any easier as they attempt to ‘normalise’ monetary conditions, shame they didn’t think about that last year.

We expect the Federal Reserve to press on with rate increases against a backdrop of strong labour markets and this is reflected in two-year Treasury rates at 2.6%. The Bank of England is in more of a bind and will struggle to get Base Rates much higher, the two-year gilt yield is just 1.4%. We stick to the view that the current, alarming, inflation rates are probably a peak and expect the rates to tail-off as the year progresses.

As we have mentioned before, markets have moved to ‘price in’ likely rate increases, add to this a further move wider in credit spreads (in sympathy with equities) and we begin to see some interesting opportunities. So, we have continued to edge-up the Fund’s exposure to credit, though, as before, we do not wish to increase the overall duration, which remains at 2.2 – see chart, right.

Within the portfolio changes have not been substantial, the backdrop is still too uncertain for that. We added a new holding in a Whitbread 2.375% bond due in 2027 (yield of 4%, duration of 4.5) and added to an existing holding in a Vodafone 4.875% bond with a call in 2025 at a yield of 5.1% and duration (to the call) of 2.3. Financed with modest sales of short-dated floating rate notes. We also took stock in a placing of new shares in International Public Partnerships, the infrastructure company, which closed during the period. Aviva have just made a return of capital of just over £1 per share and consolidated their share capital. We re-invested the money returned into Aviva equity, maintaining our weighting. Sterling has fallen sharply against the US dollar over the year, we took the opportunity to sell our USD cash balance when the rate hit USD1.22, which we considered to be extreme.

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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.