07.12.23

December 2023 Investment Summary

Dark and freezing cold nights? Check. Busy shops and festive lights? Check. Another thoughtful piece from Oakglen? Check. We’ve got you covered in our Investment Summary for December 2023. The holiday season is almost upon us and perhaps we’re finally seeing a cooling of the economy, which has run hot this year.

Equities and bonds had one of their best months in years as both asset classes had powerful rallies. Continued significant declines in the rate of inflation have created hopes that the proverbial “soft landing” is upon us. Perhaps we just had it?

As the table below illustrates, nearly all equity markets produced significant positive performance for the month. Fixed income wasn’t left out, as the Bloomberg US Aggregate Index rose 4.52% for the month. US government ten-year yields fell nearly 50 basis points over the month erasing half of the rise in yields we had witnessed over the third quarter.

 

Please note: Returns include reinvested dividends

Source: Bloomberg

 

As illustrated below, inflation is now approaching the target rate of 2%, leading financial markets to conclude that central banks have not only finished raising rates but that they will likely be cutting rates by late spring or early summer of 2024.

 

Source: Refinitiv – Financial Times

 

In response, the central banks have been pushing back on this notion with Chairman Powell of the US Federal Reserve, President Lagarde of the European Central Bank, and Governor Bailey of the Bank of England, all asserting that it is premature to declare victory and initiate rate cuts.

Their apprehension stems from their failure to properly addressing inflation in 2021, when they told us it was transitory. They are determined to ensure that inflation is unequivocally on track toward their 2% targets before contemplating any loosening of monetary policy.

Is the market’s assessment accurate regarding the absence of further interest rate hikes and probable policy easing next year?  

We believe they are partially correct. Economic data suggests some early signs of moderation in US consumption and a small reduction in the tightness of the US labour market, reducing the likelihood of the Federal Reserve needing to raise rates again. It’s important to note that the Federal Reserve is still shrinking their balance sheet by $90 billion per month, representing a continued tightening of monetary conditions, even without directly increasing interest rates.

European and UK economic data have been even softer than that of the US, suggesting that their current monetary policy settings are restrictive enough, warranting little need for further rate hikes. However, we disagree with the markets expectation of rate cuts in the first half of next year. We anticipate the central banks will prefer to observe a few more months of declining inflation rates and additional signs of weakening of growth, particularly some easing of the labour markets, before considering to loosen policy.

Despite the recent significant market rallies, which have effectively eased financial conditions, we do not believe central banks are concerned about current interest rates being excessively tight. Recent statements from central bankers suggests they are at present very comfortable with existing policy, and they remain vigilant, whilst closely monitoring data and being prepared to act in either direction as necessary. The risk of policy error is high.

As we discussed at our recent 2024 outlook investment conference, we feel the major economies are navigating between a soft landing and what we term as no landing, with a recession not appearing inevitable. The past two years of inflation fighting by central banks have made it difficult for investors but we suspect the worst may be over.

 

Source: Bloomberg. Data up to 30.11.2023

 

We expect rates will remain elevated (above pre-COVID-19 levels) but may not need to go higher to defeat inflation. Ongoing adjustments to the current level of interest rates are underway, and many borrowers have yet to fully experience the repercussions. We anticipate there will be more negative surprises as outstanding debt is rolled over at the higher levels. During our recent conference, we mentioned opportunities we saw in Healthcare, Defence, and Energy. Additionally, we believe there is some attractive opportunities in the front end of the yield curves, particularly in 3 to 5 years maturities in fixed income.

We continue to maintain an underweight position in stocks and markets with notably high valuations, choosing instead to favour companies and markets with less demanding valuations. While we anticipate market apprehension regarding the timing of potential rate cuts and do not forecast a recession, we believe investors should remain prepared. Acknowledging the fallibility of central bankers – as evidence by their declaration that inflation would be transitory – we adhere to a cautious and conservative approach in our strategic positioning.

As we move into 2024, we uphold our cautious and conservative portfolio positioning, avoiding the runaway expansion of price-to-earnings ratios in the technology sector. Owning stocks with excessively high valuations leaves little margin for error in the event of sudden shifts in these valuations.  Additionally, we maintain moderate fixed income duration, as we do not anticipate rate cuts coming as quickly as the market is currently pricing.

Furthermore, we foresee expected concerns about fiscal deficits potentially putting upward pressure on yields. We believe our fixed income positioning has sufficient duration to provide support in the event of a recession. Although November saw a decline in volatility for risk assets, we acknowledge the lingering possibility of volatility spikes. Nevertheless, we maintain confidence in our strategic positioning, which will enable us to navigate these challenges.

 

Explore more engaging insights from our experienced team of professionals; Chief Investment Officer Jeff Brummette covered November market trends in the recent Investment Summary for November 2023, whilst our Managing Director Dominic Tayler summarised the economic impact of the UK Autumn Budget 2023.

Stay tuned for more insights from Oakglen on the hot topics and latest trends in the financial markets. You can also sign up to our mailing list for more regular communications using the section below or get in touch with one of the team.

Jeff Brummette
Chief Investment Officer

Disclaimer

This document is distributed by Oakglen Wealth Limited and / or Oakglen Wealth (Jersey) Limited (hereafter “Oakglen”) to you for your information and discussion only. Unless otherwise stated nothing in this document constitutes investment, legal, accounting, real estate, conveyancing, surveying or tax advice, or a representation that any investment is suitable or appropriate to your individual circumstances, or otherwise constitutes a personal recommendation to you. It is not a solicitation or an offer to buy or sell any security or other financial instrument. Any information including facts, opinions or quotations, may be condensed or summarised and is expressed as of the date of writing. The information may change without notice and Oakglen is under no obligation to ensure that such updates are brought to your attention. The price and value of investments and any income that might accrue could fall or rise or fluctuate. The price of shares and income from them may fall as well as rise and is not guaranteed. You may not get back the amount of your original investment. A change in the economic environment, possible changes in the law and other events may cause future performance to deviate from that expressed or implied in this document. Please note that past performance, simulations and forecasts are not a reliable guide to future returns. If an investment is denominated in a currency other than your base currency, changes in the rate of exchange may have an adverse effect on value, price or income. Investing in Packaged Retail and Insurance-based Investment Products (PRIIPs) carries a high level of risk and may not be suitable for all investors.

Any information provided by a client and used to produce this document will have been checked by Oakglen for plausibility only and the client notified accordingly of any obvious anomalies. This document and any related recommendations or strategies may not be suitable for you; you should ensure that you fully understand the potential risks and rewards and independently determine that it is suitable for you given your objectives, experience, financial resources and any other relevant circumstances. You should consult with such adviser(s) as you consider necessary to assist you in making these determinations. The opportunities and risks associated with each investment product can be found in the relevant underlying securities prospectus and any other supplementary documents. All documents will be made available at any time upon request.

Oakglen does not advise on the tax consequences of investments, and you are advised to contact a tax adviser should you have any questions in this regard. The levels and basis of taxation are dependent on individual circumstances and are subject to change. This document may relate to investments or services of an entity/person outside the United Kingdom, or to other matters which are not regulated by the Financial Conduct Authority, or in respect of which the protections of the Financial Services Compensation Scheme. Further details as to where this may be the case are available on request in respect of this document. Additionally, this document may relate to investments or services of an entity/person outside Jersey, or to other matters which are not regulated by the Jersey Financial Services Commission, or in respect of which the protections of the Jersey Financial Services Commission for retail clients. Further details as to where this may be the case are available on request in respect of this document.

This document has been prepared from sources Oakglen believes to be reliable, but we do not guarantee its accuracy or completeness and do not accept liability for any loss arising from its use. Oakglen reserves the right to remedy any errors that may be present in this document. Oakglen, its affiliates and / or their employees may have a position or holding, or other material interest or effect transactions in any securities mentioned or options thereon, or other investments related thereto and from time to time may add to or dispose of such investments.

This document is intended only for the person to whom it is issued by Oakglen. It may not be reproduced either in whole, or in part, without our written permission. The distribution of this document and the offer and sale of the investment in certain jurisdictions may be forbidden or restricted by law or regulation. This communication does not constitute the solicitation of an offer to purchase or subscribe for any investment or service in any jurisdiction where, or from any person in respect of whom, such a solicitation of an offer is unlawful.

Investments may have no public market or only a restricted secondary market. Where a secondary market exists, it is not possible to predict the price at which investments will trade in the market or whether such market will be liquid or illiquid. As such, for investments not listed or traded on any exchange, pricing information may be more difficult to obtain, and the liquidity of the investments may be adversely affected. A holder may be able to realise value prior to an investment’s maturity date only at a price in an available secondary market. The issuer of the investment may have entered into contracts with third parties to create the indicated returns and/or any applicable capital protection (in part or in full). The investment instrument's retention of value is dependent not only on the development of the value of the underlying asset, but also on the creditworthiness of the Issuer and / or Guarantor (as applicable), which may change over the term of the investment instrument. In the event of default by the issuer and/or Guarantor of the investment, and / or any third party the investment any income derived from such contracts is not guaranteed and you may get back none of, or less than, what was originally invested. Parties other than the Issuer or Guarantor (as appropriate) mentioned in this document (for instance the Lead Manager, Co-structurer, Calculation Agent or Paying Agent) do neither guarantee, repayment of the invested capital nor financial return on the investment product, if nothing is indicated to the contrary. Any capital protection given is usually an inherent part of the product; provided through the use of options, futures or other derivative products. You may have to accept smaller returns on an investment relative to a direct investment in the underlying index, basket, etc. because of the costs involved in providing the capital protection. Such capital protection normally only applies if the investment is held until maturity. The amount of initial capital to be repaid may be geared, which means that a fall in the underlying index or securities may result in a larger reduction in the amount repaid to investors. Alternative investments, derivatives or structured products are complex instruments that typically involve a high degree of risk and are intended for sale only to investors who are capable of understanding and assuming the risks involved. Structured products carry counterparty risk, in that in the event of default by the issuer you may lose some or all of your capital invested even when the product carries capital guarantees. Where this document relates to emerging markets, such investments should be made only by sophisticated investors or experienced professionals, who have independent knowledge of the relevant markets, are able to consider and weigh the various risks presented by such investments and have the financial resources necessary to bear the substantial risk of loss of investment in such investments.

The services described are provided by Oakglen or by its subsidiaries and/or affiliates in accordance with appropriate local legislation and regulation. Certain products and services may not be available in all locations or to all Oakglen clients.

Data Source: Oakglen Wealth (Jersey) Limited and Oakglen Wealth Limited, otherwise specified.

Oakglen is a registered business name of Oakglen Wealth (Jersey) Limited and Oakglen Wealth Limited.

Oakglen Wealth (Jersey) Limited is regulated in Jersey by the Jersey Financial Services Commission for the conduct of Investment Business and is a limited company with company number 121454, incorporated in Jersey on 7 June 2016. Its business address is 4th Floor, 1 IFC, St Helier, Jersey, JE2 3BX.

Oakglen Wealth Limited is authorised and regulated by the Financial Conduct Authority. The registered address of Oakglen Wealth Limited is 30 Golden Square, London, United Kingdom, W1F 9LD and is registered in England and Wales with number 13182724.

It has come to our attention that certain individuals are falsely claiming to represent Oakglen Wealth Limited, using identity to falsely obtain goods or services from third parties. These fraudsters may be soliciting credit or other financial transactions under our name. We advise that any request for credit or advance payment of goods or services made on behalf of Oakglen Wealth Limited be treated with suspicion unless confirmed directly through the official contact details provided on this website. We strongly encourage you to contact us immediately if you are approached with any such requests. Oakglen Wealth Limited fully rejects any liability for losses, damages, or fraudulent activity that may arise from interactions with fraudsters.

X