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Portfolio update 25 January 2023

Happy new year to you and your family. We wish you health and happiness in 2023.

Equities and other Growth Assets
Strong recovery from the lows of September 2022 for most markets

Global equities have rebounded strongly from their recent lows at the end of September 2022 and whilst markets fell in December, most markets have had a strong start to 2023.

The Australian share market has recovered much of its fall over the past 12 months, whilst US markets are still around 10% below their levels of last year, with the Nasdaq (which largely represents technology companies) still down around 20% from a year ago.

Late last year, we saw China relax its COVID policies which had depressed its economic activity over the past three years and augers well for Chinese growth over the coming year. 

Having suffered more than most other equities markets over 2022, China and the broader emerging markets have been the strongest performers for 2023 to date. 

Australian listed property, which was one of the worst performing sectors for the 9 months to September 2022, has also rebounded strongly since then to be one of the best performing sectors since.  Gold has remained relatively steady over the past 12 months, whilst silver, having at one point having fallen over 20% since the start of 2022, finished the year with a positive return, before coming off a little in January.  Infrastructure, which was one of the best performing sectors over the first 9 months of 2022, came off over the final quarter of the year to finish relatively flat for the 12 months.

Your portfolio has exposure to all of the aforementioned sectors to varying degrees.

Importance of Diversification and Avoiding Knee Jerk Reactions
What these returns show is the importance of diversification, as not all markets will behave the same way at the same time, and also the importance of not taking knee jerk reactions when certain markets and investments perform poorly, as often they are the ones that have the strongest recovery when conditions improve.

The equities exposure in your portfolio remains well diversified across different regions and economies (both developed markets and emerging markets around the world) and also between larger, well established companies with well known brand names, and smaller, lesser known companies which display strong quality characteristics. We continue to believe that this is the best way to position the portfolio in these uncertain times.

Fixed Interest
Bond returns for 2022 were unprecedented. Australian and Global aggregate bond indices returned -9.71% and -12.28% respectively, the worst calendar year performance on record based on historical data available. Multi-decade high inflation coupled with heightened geopolitical tensions (i.e. Russian invasion of Ukraine) contributed to government bond yields more than doubling and credit spreads widening in some regions including Australia to above COVID-19 highs.

Calendar Year Bond Returns

Our Investment Committee made the decision back in 2021 to exit fixed interest securities and have exposure to floating rate securities, which tend to fare better in rising interest rate environments, and this has proven to be the case during the past 12 months. 

The investments in your portfolio under the “fixed interest” banner are the Arculus Preferred Income Fund, which returned -0.51% for the 2022 calendar year and the Realm High Income Fund, which returned 0.30% over the same period.  These returns are significantly stronger than those of Australian and Global aggregate bonds as shown in the above chart.

What’s Ahead
Inflation and Interest Rates remain the two major influences on investment markets as we enter 2023, and further their impacts on economic growth and the hopes for a “soft landing” both here and in the US (a soft landing refers to being able to get inflation under control without causing a recession).

US corporate earnings season is underway and earnings reports will give an indication of the impact economic conditions are having on the economy, with investors also closely monitoring comments on the forward outlook.  Tight financial conditions and the US Federal Reserve’s rate tightening cycle are expected to have an impact, as well as the tight US labour market which has seen strong wage growth, coupled with building consumer anxiety potentially squeezing profit margins in some sectors.

In early February, both the US Federal Reserve and the Reserve Bank of Australia will meet to determine what, if any, changes will be made to official interest rates, following aggressive increases during 2022.  Rates are expected to increase both here and in the US, but the level of increase is up in the air.  Comments from both central banks on their intentions moving forward will be closely monitored with hopes that they give an indication as to when they will stop raising rates.

With uncertainty remaining, Collins House will continue to manage the portfolios closely and make changes if and when necessary.  Currently, we continue to make slight increases to the holdings in Australians and international small cap companies (VSO and QSML) but otherwise we are comfortable with the mix of investments in each portfolio and believe they are well positioned to cope with the uncertainly that lies ahead.

If you have any questions about the above, or would like to discuss your portfolio in more detail, please don’t hesitate to contact your Advisor.

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