Peter Spiller shares his latest on the inflation outlook and reveals new portfolio changes.
In his half-yearly update to investors, Spiller said there were many volatile inflation components that would likely pull headline inflation down over the coming months.
“These include food and energy, where costs remain high but have come down from their peaks earlier in the year. Many of the bottlenecks that had built up over the pandemic, such as in semiconductors and shipping, have eased or even gone into surplus. Interest rates are rising rapidly, causing demand to contract, and suggesting that the economic outlook is likely to be very weak,” he said.
His comments come during the same week as a lower-than-expected US inflation figure for October. Prices rose 7.7% compared with an expected rise of 7.9%, and core prices, which exclude food and energy and are regarded as a better indicator of underlying inflation, rose 6.3%
Spiller adds that given the trend of volatile “non-core” prices falling, it is quite likely that headline inflation will soon drop well below core inflation. This would give “the initial impression that inflation is under control, even though the underlying inflationary pressures in the economy remain strong”.
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Falling inflation is excellent news for markets. Not only does it decrease pressure on central banks to raise interest rates, which is good for stock and bond market prices, but it will encourage economic growth as consumers will not be as squeezed economically. However, with recessions globally already looking very likely, company profits may come under pressure.
Spiller says: “The impression of weakening inflation combined with a recessionary economic backdrop may give central banks cover to cut interest rates again at some point next year. The backdrop of falling short rates and volatile inflation, which cycles above a higher average than has been normal over the last decade should be a good backdrop for index-linked bonds.
“Interest rate volatility combined with a likely recession could well prove a headwind for equities. Thus, the portfolio remains defensively positioned with a focus on inflation-protected assets.”
Recent activity for Capital Gearing includes adding to UK gilts and index-linked gilts after their sharp sell-off following the mini-budget in September. It also sold some exchange-traded funds (ETFs) and used the opportunity to increase exposure to investment trusts on wide discounts.
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Spiller said: “Our response to the gilt market implosion and the associated weakness in sterling has been to increase our gilt holdings and sterling exposure. In the weeks around the period end, we added 5% to our UK index-linked bond holdings, investing at a range of durations from the 2027’s through to the 2050’s.
“It is exciting to invest in long duration UK index-linked bonds again after many years of being ‘priced out’. It is a natural asset for a conservative sterling investor to hold. However, our excitement is tinged with a sense of regret that recent government policy disruption will have long-term negative consequences for the UK.”
The trust is also considering more property investments, which is a part of the investment universe that has been punished by rising interest rates.
In the six months to 30 September 2022, the net asset value (NAV) per share of Capital Gearing was 4,798.4p, compared to 5,025.1p on 31 March 2022.
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This represents a total return of -3.5% over the past six months, and -1.8% over the past 12 months. Over those periods the share price return was -7% and -5%.
Since 30 September, the NAV has recovered to 4,859p as at 9 November 2022. The all-time NAV high of 5,076p was reached on 18 August 2022.
Chair Jean Matterson said: “While disappointing in absolute terms, it is a relatively satisfactory result when compared to overall market declines. The performance of the company’s NAV has been less than the fall of 5.8% in the MSCI UK Index over the past six months.”
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