VAM Managed Funds (Lux) Commentaries

December 2022 (click here to download)

VAM Fund

December proved a tricky final month of the year after November’s strong showing across both equities and fixed income. Performance was much more mixed during December. Overall, global equities struggled, especially as the US markets sold off, with some of the large-capitalisation high beta names being particularly affected. Continuing the theme we have seen this year, value continued to outpace growth as investors remained somewhat reticent to pay higher multiples in a more uncertain economic environment. There are a number of headwinds for both global economies and the markets. Most of these have been in place since the end of 2021, i.e. higher inflation, oil price volatility and rising Central Bank rates. The Manager saw a more hawkish stance from the Fed during December as it made it clear it is not comfortable with easing financial conditions prematurely especially as inflation may be slow to return to its target level. This renewed hawkishness is partly driven by the robust employment figures and rising wages, but also by the expectation that there will potentially be a mild recession at some point this year. The US economy is in a better state than many expected 12-24 months ago, so is much better positioned to weather the downturn, especially as the market seems to have already priced in the impact of it. Inflation easing and the relatively robust level of household savings will mean that the US economy will not have to endure a protracted economic downturn.

Many economists and commentators are forecasting that we have already gone beyond peak inflation and that the Fed will probably have reached the limit of its rate rises by the middle of the year. The effects of this, however, will take some time to feed down into the economy at large. The market on the other hand is a forward-looking entity and we will likely see investors looking to find well-priced investments as sentiment improves. This will likely be well before we see the consequent improvement in economic conditions, hence the likelihood of the previously mentioned mild recession. While the US seems to have weathered the worst of the fiscal and economic storm, there are potentially some issues in store as power transitions from the Democrats to the Republicans in the lower house and, if the elections for the new speaker are anything to go by, we could see some political roadblocks to new legislation designed to further stimulate growth.

Further afield, the expectations for China remain positive despite the economically damaging extended period of lockdown during 2022. The country is now emerging from the tight restrictions that were in place during the pandemic and industrial output is beginning to ramp up to full capacity. With this comes the inevitable rise in new Covid cases and the consequent hospitalisations and deaths. If China can limit overall numbers of the seriously ill by a faster roll-out of its revised vaccine strategy and deal quickly with outbreaks as they arise, then the GDP target of around 5.4% should be achievable. China is key to the success of many of the other ‘second tier’ EM countries as their economies are so intertwined with that of their economic powerhouse neighbour. The Manager thinks valuations are at attractive levels, so investment risk is moderated considerably compared to a year ago.

During last year, the Chinese market lost value and dragged down other Emerging Markets. Volatility remains high, but valuations in many asset classes now look attractive. A lot of bad news is already discounted and, while there could still be economic weakness into 2023, it looks like markets are already anticipating the recovery that many investors are predicting later in the year as the Manager saw a precursor to this with some strong performance in Q4 for Chinese ‘A’ shares.

There will inevitably be challenges this year especially during the first half but, given where valuations are, it is a good time to maintain or increase exposure with the likelihood that the worst of the market sell-off is behind us and that the outlook for the second half of the year is more positive.

VAM DISCRETIONARY FUNDS

VAM Cautious Fund

Over the month of December, Central Banks continued to raise interest rates, albeit at a slower pace. Over the month, global equities fell over 5% as investors realised that interest rates may stay higher for longer than previously expected. Consumer discretionary and technology stocks fell the most, declining over 9% as recession sensitive stocks and growth stocks reacted to the moves in fixed income and interest rate expectations. Fixed income yields recalibrated with interest rate sensitive instruments falling in price. UK gilts fell just over 4% to push 10-year yields back above 3.5% and investment grade credit lost around 1% while high yield bonds were roughly flat.

VAM Balanced Fund

Over the month of December, Central Banks continued to raise interest rates, albeit at a slower pace. Over the month, global equities fell over 5% as investors realised that interest rates may stay higher for longer than previously expected. Consumer discretionary and technology stocks fell the most, declining over 9% as recession sensitive stocks and growth stocks reacted to the moves in fixed income and interest rate expectations. Fixed income yields recalibrated with interest rate sensitive instruments falling in price. UK gilts fell just over 4% to push 10-year yields back above 3.5% and investment grade credit lost around 1% while high yield bonds were roughly flat.

VAM Growth Fund

Over the month of December, Central Banks continued to raise interest rates, albeit at a slower pace. Over the month, global equities fell over 5% as investors realised that interest rates may stay higher for longer than previously expected. Consumer discretionary and technology stocks fell the most, declining over 9% as recession sensitive stocks and growth stocks reacted to the moves in fixed income and interest rate expectations. Fixed income yields recalibrated with interest rate sensitive instruments falling in price. UK gilts fell just over 4% to push 10-year yields back above 3.5% and investment grade credit lost around 1% while high yield bonds were roughly flat.

Sources: Rivers Capital Management and atomos.
atomos is the trading name of Atomos Investments Limited, which is authorised and regulated by the Financial Conduct Authority. Atomos Investments Limited is registered in England and Wales, No: 2041819. Registered office: Monument Place, 24 Monument Street, London EC3R 8AJ.

South African Investors: This is a Section 65 approved fund under the Collective Investment Schemes Control Act 45, 2002 (CISCA). Boutique Collective Investments (RF) (Pty) Ltd is the South African Representative Office for this Fund. Boutique Collective Investments (RF) (Pty) Ltd is registered and approved under the Collective Investment Schemes Control Act (No.45 of 2002).

Disclaimer

VAM Fund, Cautious, Balanced and Growth Funds are compartments of VAM Managed Funds (Lux).

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