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Alice Rigby
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Updated 10 Feb 2023
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Disclaimer

This is not substantive investment research or a research recommendation, as it does not constitute substantive research or analysis. This material should be considered as general market commentary.

The markets never stand still, but at times it can feel like they haven’t even stopped to catch a breath. While you’ll see analysts and reporters calling a trading period tumultuous relatively regularly, the last week-and-a-half can certainly make a case for being one of the more confusing – or confused – phases recently.

A series of US data releases over the last two months have fueled some cautious optimism among investors and observers. Consumer spending has fallen but not tumbled, house prices are holding up while sales volumes fall, and layoffs have been relatively limited to a few white collar sectors. At the same time, the Bank of England has suggested that the UK’s recession will be shallower and shorter than it previously indicated. Meanwhile, the eurozone avoided recession entirely in the fourth quarter, and has recorded three successive months of declining inflation.

However, these positives are balanced on a knife edge. The world’s economies are facing the dual, conflicting challenges of inflation and recession. For instance, strong jobs data suggests that recession may be avoided in the US; yet at the same time, artificially retaining long sought-after employees could make inflation stick and force the Federal Reserve to maintain or raise its high rates (as it has indicated it will do). The positive outlook is tentative at best.

Which all makes it the more jarring that markets have been quite so reactionary in the first weeks of 2023. The S&P 500, heavily represented in many portfolios, has seen something of a rally since the start of the year, rising by around 8%. With analysts projecting a year-on-year earnings decline for the S&P 500 for the first time since Q3 2020 – the nadir of the pandemic – this has certainly not been driven by strengthening fundamentals, which suggests that it is indeed the economic data that is inspiring investors’ positivity.  

However, when strong jobs data was reported on Monday, stocks took a dip as the reality of higher rates for longer hit home. It’s almost as if investors themselves cannot decide what to make of this picture.

So, where do you look when the public markets are acting unexpectedly?

One area could be the private markets, where the underlying assets are by definition less volatile, given they are only revalued periodically. Clearly, listed trusts can suffer alongside other equities in share price terms when the market as a whole is experiencing significant volatility. However, buying into a trust whose assets have a more solid underpinning in terms of valuations when it is on a significant discount – where there is little real reason for the discount to have widened –may offer real upside potential for the trust when market volatility retreats.

Well-established trusts with long-term track records that currently meet this criteria include listed private equity constituents such as NB Private Equity Partners (NBPE) and ICG Enterprise Trust (ICGT). NBPE, which is primarily invested in the US, targets more mature companies with well-established revenue growth, while ICGT’s underlying investments have a similar strong track record of revenue growth but are more evenly spread between the UK/Europe and the US.

Alternatively, the flexible investment sector consists of trusts that seek to outperform through the cycle and, as the name suggests, have the flexibility to invest outside of public markets. One such trust is Momentum Multi-Asset Value Trust (MAVT), which targets returns of CPI +6% per annum over a cycle. It has almost half its assets allocated away from directly-held public shares, including in fixed income funds and ‘specialist’ funds such as Doric Nimrod Air Two, which generates a return from obtaining, leasing and selling an aircraft.

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