DPMS Portfolio Commentary February

Given our more cautiously positive outlook for 2023, including a mild economic recession, continuously high interest rates and the reopening of the Chinese economy, the Vizion Wealth Investment Committee have agreed to a shift towards a balance of Defensive and Cyclical equities utilising both Growth and Value styles. This comes in the form of a move towards Value funds in the UK, Europe & North America which have historically outperformed during periods of interest rate increases and a move towards Growth funds in Asia and Emerging Markets in conjunction with the Chinese economy reopening and supply chains becoming re-established. We have also reallocated a portion of our alternative non-equity exposure towards traditional fixed interest, as well as a smaller allocation towards Emerging Markets fixed interest to benefit from attractive yields on offer and to benefit from the possibility of capital growth should interest rates peak in 2023

Whilst interest rate continues to rise in developed economies, historically Growth equities have remained out of favour, however, with projections showing Central Banks may start to consider reductions to base rates from mid to late 2023 for the US, UK and European economies, Growth equities may fall back into favour with investors. However, these decisions will be driven by inflation data.  Within our portfolios, our UK, North America and European equity exposure in particular have reasonable levels of allocations towards Value sectors which we expect to outperform in the current economic environment. These value sectors include Financials and Industrials.

Now that China has reopened its economy after a prolonged period of following a zero covid policy, it seems unlikely that this will be reversed and their government will continue to push towards its economic targets. This may result in possible interest rate cuts to spur growth, which would be beneficial to Growth style equities in the region. Given the reopening of the Chinese economy, we have therefore replaced our Value/Income Asian fund with a Growth focused Asian fund with more of an emphasis on Chinese allocation. Valuations of Growth shares within the region are at attractive historic levels and we see this as a suitable entry point. We have also increased our overall Chinese exposure in line with this rationale and have introduced an Emerging Markets bond to benefit from attractive yields and the improving economic environment in the region given the Chinese economy re-opening.

Fixed interest began to recover in Q4 2022, after Kwasi Kwarteng’s disastrous mini budget which resulted in a significant fall in the capital values of most fixed interest instruments. After a reasonable recovery to capital values, we feel there is still lots of value within the asset class, with yields looking attractive in some sectors and with the opportunity of capital growth when interest rates start to fall. We have therefore reallocated a reasonable portion of our alternative non-equity (property, cash and absolute return funds) towards traditional fixed interest both in the UK and globally. We have also introduced a new UK fixed interest fund with a focus on actively managed investment grade bonds, which we expect both to deliver return & income and weather recession-related activity.

All in all, the changes to the portfolios for Q1 focus on retaining balance whilst selecting opportunities within individual sectors to play to the strengths of each geographical region. The portfolios are well positioned to benefit over the long-term with exposure to a variety of areas, including a further bolstered traditional fixed interest allocation. After a positive start to all portfolios in the first 5 weeks of 2023, we expect this year will provide a more positive outcome for well-constructed and diversified portfolios as we progress through the threats of recession and the economic cycle. As always, if you would like to talk to us about any aspects of your investment portfolio or risk profile, feel free to contact your financial adviser.