The end of year rally of markets came to a halt in December with the final month of the year delivering negative returns. The FTSE All World index declined 3.7%. The Global Equity Growth Model Portfolio also declined 3.7% which, given the geographic risk exposures was a little disappointing. On the positive side, China continued along a path of reopening and the prices of equities with links to the country generally continued to rise. We have previously explained our thesis of the likely end to the zero covid policies in the nation, the depressed share prices of Chinese equities, which help support the relatively high exposure to the country taken in the fund. Backwards looking economic data demonstrated the impacts of the historic zero covid policy with several downgrades to economic growth observed at a macro and micro level within China. Looking forwards we now expect this to reverse. Tencent was one of the best performing stocks held during the month returning 16.3%.
Other stocks performing well included Argonaut Gold (+36.9%) and Lancashire (+10.6%). The team enjoyed a meeting with new Argonaut’s new CEO Richard Young. Richard has an impressive background within the industry, most recently leading Teranga Gold which was sold to Endeavour Mining. Encouragingly the Magino project remains on track to be fully operational by the end of quarter two. Meanwhile, investigations into the potential to better develop some other sites owned by the company is being undertaken. We noted after the meeting, the CEO acquired a large personal shareholding in the open market. The environment for underwriting remains healthy for Lancashire, and sentiment appears to be returning to the sector.
On the negative side the prices of semi-conductor stocks generally continued to decline.
Trading activity was limited.
The drivers for equity returns remain global liquidity, earnings, valuation and sentiment. The outlook for equities in 2023 and beyond still materially depends on what happens to inflation given the influence this has on the policies of central banks and hence global liquidity. If inflation continues to outstrip GDP growth then central banks will have little choice but to further drain liquidity. Earnings revision risk is generally tilted to the downside with consumers retrenching given increasing costs of living. There are however bright spots within certain sectors and geographic exposures. Valuation multiple of high growth companies have fallen dramatically though many remain at somewhat elevated levels compared to history. While tough covid times ahead may be difficult for a largely unvaccinated nation, Chinese equities remain reasonably priced and continue to look attractive.