Reports

February 2023 (click here to download)

VAM Fund

Despite being the shortest month, February was not without incident, and we saw some fundamental changes in investor sentiment during the month. At the end of January, the consensus for US Fed rate expectations was that there would be a cut in late Q2 or early Q3 of this year. This expectation began to shift as February wore on and the markets began to factor in the potential that the Fed would not deliver the expected rate cut and could in fact continue with its rate rise programme as it battled to bring inflation under control. The bond markets were ahead of the equity markets with this outlook change, but this sentiment has recently been reflected in the performance of some of the major equity Indices.

The cause of this upward pressure on interest rates is rooted in the fact that core inflation has remained stubbornly high and seemingly immune to the Fed’s efforts to bring it down with the rate rises that it has put in place so far. There are numerous articles in the press and much anecdotal evidence about how inflation has fallen, but this has mainly been headline inflation, which has been declining as wholesale energy and food prices fell over the past few months following a relatively mild winter in Europe. Core inflation, which excludes those two elements, has persisted and seems to be worrying the FOMC committee members, especially as a number of economic indicators, employment data in particular, have continued to be robust.

The latest jobs data show new jobs being added alongside continuing wage inflation. The Fed target is to begin to see the job market contract and wage inflation start to weaken with it. This would be the first indicator that the implementation of a higher base rate is beginning to work to tackle core inflation. The fundamental risk the Fed faces is that it has put the economic brakes on too hard, then the long-predicted ‘soft landing’ for the economy could become a prolonged full-blown recession. The Fed will likely maintain its hawkish stance, but this should no longer be a surprise to investors as the economic indicators have been suggesting this for a few months now and may be increasingly necessary if the long-term inflation puzzle is to be solved any time soon.

What this means for markets, at least in the near term, is that there is a greater risk of increased volatility especially for those companies that are more sensitive to higher interest rates, namely those that need borrowing to grow or those that are having to refinance debt at higher rates. Given the sell-off that we saw last year, many companies are still well below some of the peak valuations that were seen at the end of 2021. There has been a significant rally in growth stocks this year, particularly in the technology sector, but valuations remain reasonable across several other sectors.

As mentioned in last month’s commentary, two down years in a row for the S&P 500 is unusual especially given the strong showing in January, so it is important to continue to allocate to equities and not be phased by any inevitable volatility in the market.

Much of the performance of the markets this year will be stoked by the actions of Central Banks as they attempt to bring inflation under control and catalyse their respective economies back onto a growth footing, especially in the absence of large-scale quantitative easing. We will likely continue to see increased volatility coupled with pull-backs or pauses in the upward trajectory of the markets, but the Manager views this as constructive as it gives the market time to consolidate and allows earnings to catch up to valuations, something that is important to the long-term health of the market. The Manager continues to believe that we will see positive growth this year and remains ready to take advantage of good opportunities when they arise.

VAM DISCRETIONARY FUNDS

VAM Cautious Fund

Following an encouraging start to the year in January, aided by falling inflation and signs of the end of rising interest rates, we saw interest rates rise by 0.5% in the EU and UK, and 0.25% in the US in the first few days of February. Resilient economic data followed through February and showed a stronger near-term economy than initially thought, indicating that interest rates will likely be higher for longer. Despite this, European and UK equity markets were both up following improved company earnings and guidance. US markets were down as was Asia ex-Japan and Emerging Markets, with bonds struggling as US yields reached their highest levels since November.

VAM Balanced Fund

Following an encouraging start to the year in January, aided by falling inflation and signs of the end of rising interest rates, we saw interest rates rise by 0.5% in the EU and UK, and 0.25% in the US in the first few days of February. Resilient economic data followed through February and showed a stronger near-term economy than initially thought, indicating that interest rates will likely be higher for longer. Despite this, European and UK equity markets were both up following improved company earnings and guidance. US markets were down as was Asia ex-Japan and Emerging Markets, with bonds struggling as US yields reached their highest levels since November.

VAM Growth Fund

Following an encouraging start to the year in January, aided by falling inflation and signs of the end of rising interest rates, we saw interest rates rise by 0.5% in the EU and UK, and 0.25% in the US in the first few days of February. Resilient economic data followed through February and showed a stronger near-term economy than initially thought, indicating that interest rates will likely be higher for longer. Despite this, European and UK equity markets were both up following improved company earnings and guidance. US markets were down as was Asia ex-Japan and Emerging Markets, with bonds struggling as US yields reached their highest levels since November.

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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).

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

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