Market Development: The markets rallied during the month despite the horrible situation in Ukraine, as the initial shock and fears dissipated and given the fact the war at this stage is still quite localised in nature.
Oil and gas have not stopped flowing, although prices have obviously changed, and the world keeps turning. Economic growth is still looking good as economies reopen post-COVID.
It has now become clear that Russia has no real intention to withdraw from Ukraine any time soon, as this would represent an admission of defeat by Mr Putin. Indeed, he has made it clear that he will keep on fighting.
We should be prepared for a nasty struggle with Russia which may last some time. Human suffering in Ukraine will probably increase and the risk remains that NATO becomes sucked into the fighting.
It is also becoming clear that there will be many economic impacts due to the upset of supply chains across a wide range of industries. Food price rises will impact the Middle East and parts of Africa particularly hard, with the potential for great suffering; we are already seeing the political consequences of these types of shocks play out in Sri Lanka. The COVID lockdowns in China are also starting to have an impact.
Despite these issues, the Federal Reserve is intent on raising interest rates quickly, while simultaneously reducing its balance sheet. We saw the effects of a reduction in the balance sheet during Q4 2018 when markets fell steeply; this time around the Federal Reserve intends to be more aggressive in its unwind.
In light of this background, we remain extremely cautious in the outlook for the financial markets with expectations of heightened volatility as the year progresses. Accordingly, we are reducing the cyclical exposure of the portfolio as well as running higher than normal cash levels.
The Strategic Global Quality Fund rose by 1.6% over the month, compared to the Index which rose 2.7%. The main detractor was the overweight to the Consumer Staples sector (25% versus the Index at 7%) given the rising yield curve punishing long-duration stocks.
Please note the Fund does not have any exposure to the Telecoms or Utilities sectors, due to the high levels of government regulation.
On the positive side, PayPal added approximately 50 bps of alpha during the month. The Fund only recently established a position in PayPal, which it has not owned before, as the stock had been hit very hard in recent results. The company remains well-positioned as it should be a key beneficiary of the continued migration of shopping habits, from physical stores to the internet.
E-commerce penetration in the United States is still substantially lower compared to countries such as China and the United Kingdom, implying that PayPal should have many years of structural growth in front of it. There were no significant underperformers during the month.
As always, we invite investors and prospective investors, to get in touch should you wish to discuss the positions held in the portfolio. Please do not hesitate to contact us for further information.
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The views and statements contained herein are those of Lofoten Asset Management in their capacity as Investment Adviser to the fund as of 13/04/2022 and are based on internal research and modelling. Please click on Disclaimer Page to view full disclaimers.