Market Development: The stock markets showed their traditional “last month of the year” behaviour by rallying nicely across the board – the United States market was up by 4.4%, while Europe and Japan were up 6.1% and 1.6% respectively. The positive sentiment was largely driven by the realisation that Omicron does not seem as deadly as initially feared, and that disruption to economic activity would be not as significant compared to earlier periods.
The sectors that performed well were the more value-oriented areas of the market (Financials and Commodities) given the expectation that the Federal Reserve will begin to raise interest rates following the end of the QE programme in March. The Oil sector performed well on continued good behaviour from the OPEC cartel, but importantly, also driven by increasing demand.
We expect that 2022 will be a year where the development of the financial markets will not necessarily follow the expected strong economic growth. GDP growth forecasts of 4+% around the developed world are not uncommon given the continued normalisation of the economies as COVID becomes an endemic rather than a pandemic. That said, the high levels of inflation in the United States have caused the Federal Reserve to shorten the QE programme in addition to flagging continued interest rate rises for 2022 and 2023.
Whilst this is good for the sectors which benefit from rising interest rates (Banks and Insurance Companies in particular), it is not so good for long-duration stocks, such as the classic defensives, but more importantly the Technology sector, due to the high valuations. Many of the expensive stocks in the market have already been derated during 2021, but expectations are that the process will continue in 2022. Sector rotation can be expected to be vicious, with the most important question being whether inflation is permanent or transitory and how the Federal Reserve will react.
In December, the Strategic Global Quality Fund was up by 7.0% versus the Index at 4.3%. This was more or less equally driven by stock selection and sector allocation effect. The most important driver was the Consumer Staples sector (1.9%), followed by the Technology sector (1.0%). The exposure to the Healthcare sector was a negative contributor (-0.5%).
On the positive side, it is interesting to see that it was a broad selection of stocks that performed well rather than a single large contributor. The top 4 contributors: Visa (reopening of the economy), McDonald’s (good operational results), SAP (travel beneficiary) and Charles Schwab (rising interest rates beneficiary) came to a total of around 1% of alpha. These stocks all remain long term holds within the strategy.
On the negative side Qiagen, Medtronic and Siemens Healthineers declined, mainly on the back of changes in COVID sentiment with Qiagen and Siemens Healthineers having been strong earlier in the year. The three together were negative 0.5% alpha. The longer-term outlook for Qiagen and Siemens Healthineers remains very good and will remain part of the portfolio.
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 19/01/2022 and are based on internal research and modelling. Please click on Disclaimer Page to view full disclaimers.