The New Year commenced with yet more poor inflation figures and a chorus of “we really mean it” from the US Federal Reserve.
Bond markets sank, the UK 10-year gilt has fallen 5% since we last wrote in mid-December and the 30-year by 11%, taking the yield on the 10-year back up to 1.3%. Similarly, in America, the 10-year yield has risen to 1.9% and, in Germany, the 10-year Bund has just made it back to a positive yield for the first time since early 2019. Possibly it will be a shock for the German treasury to have to pay their bondholders for the privilege of owning Bunds.
In our December piece we said that: “something has to give, we can’t maintain [this extreme] level of negative real returns for too long”, this remains our view. The markets are moving on quickly, expectations are now hardening for four increases in rates from the Federal Reserve this year (possibly it might be more pertinent to consider the quantum of these moves rather than the number). We still expect to see inflation easing next year, but not as much as central banks might wish.
The reaction in equity markets has been rough for ‘growth’ companies, notably in the tech sectors, while ‘value’ sectors have rallied hard. The NASDAQ is down 7% over this period with an accompanying jump in volatility. Of course, NASDAQ has been ‘re-pricing’ many of the ‘non-profitable’ tech stocks for the past six months now, what has changed this year is the shift to the profitable companies. Berenberg tell us that around 40% of NASDAQ stocks have now fallen 50% from their highs.
Our table of Tenax’ asset mix shows the position to the year-end, to complete the picture, along with the position as I write. The overall duration of our bond holdings is now 2.2 – see chart, right.
Into the New Year our trading pattern in the Fund is unchanged, we have added further to the floating rate book with an addition to the CIBC (Canadian Imperial Bank of Commerce) December 2025 issue that we initiated in early December, while a January 2022 issue of theirs matured. We also took part in a new issue from National Australia Bank, also due in December 2025, taking our overall floating rate exposure back towards 40%. The Bank of England’s December rate hike produced an immediate jump in SONIA, so the FRN issues will be increasing their coupons over the next quarter. At present, we expect the Bank to raise rates again in February, probably to 0.5%, the level which then allows them to cease to reinvest the proceeds of maturing gilts, allowing their balance sheet to begin to shrink.
We made no changes to the fixed interest holdings but have recently halved the exposure to the Glencore US dollar convertible as this moved ahead with the rally in cyclicals, and made small top-up purchases in our three remaining zero dividend preference holdings. Infrastructure had an exuberant start to the year; we reduced our holding in HICL Infrastructure in response, since when it has settled down with the realisation that these companies are liable to seek further funds. We have not made any changes to our commercial property holdings though this has had a good start to the year being bracketed with cyclicals. Amongst the equity holdings, in December we took the profit on Compass Group, which we had acquired during the spring of 2020, but now appears to be ‘up with events’. It has been rough for our smaller company exposure and the principal equity holdings have split between a good start for the financials, notably the bank holdings, while Croda and Diageo have suffered as growth stocks. Unilever has fallen by more than 10% over this period after the unwelcome announcement of their pursuit of GlaxoSmithkline’s consumer healthcare business, a purchase that would leave them with too much gearing and a leak that they did not appear to be ready for. We made small additions to the holdings in Berkeley Group, AstraZeneca and Aviva.
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