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In this month’s investor update, James McManus, chief investment officer, answers questions around the impact of stubborn inflation, the anniversary of the start of the conflict in Ukraine, the latest Brexit deal, and of course, Nutmeg portfolio performance during February. 

What concerns kept investors busy in February, and how did markets perform during the month? 

Recent weeks have been dominated by two things: better-than-expected economic data and higher-than-expected inflation (despite a drop off from peak rates). Positive economic data, such as strong labour statistics and stronger-than-expected GDP figures, indicate that an immediate global recession is not yet upon us. However, this means central banks have more work to do on tackling inflation, and an economic soft landing may make their job harder.   

As a result, future expectations for interest rates have started to move higher again, with investors no longer expecting the US Federal Reserve, or Fed, to ‘pivot’ this year and deliver a rate cut by year end. The knock-on impact has been to deliver another blow for bond investors.  

Despite a stronger-than-expected earnings season, equities remain vulnerable to higher interest rates, even if inflation has peaked. Central banks will need to do more to address the “sticky elements” that threaten to keep inflation above their targets for longer.  

How did Nutmeg portfolios perform in February?  

February was a negative month for absolute performance, given the falls in both equity and bond markets after a strong start to the year in January.  

We rebalanced our equity exposure in February to maintain our underweight position, but added to our corporate bond exposure in our medium-risk portfolios, where we see opportunities. We retained the cash weighting in our high-risk portfolios.  

With bond yields so much higher, why stay underweight? We remain of the view that the balance of risk is still in favour of underweight positioning to selected fixed income assets at the current time. Last year taught us not to underestimate monetary policy expectations, and the need for central banks to wind down holdings in their own government bonds.  

We have seen this risk present itself of late in higher terminal rate expectations for the Fed against continued strength in the US labour market. Given expectations of further interest rate hikes globally in the months ahead, and a continued strength in labour markets despite falling headline inflation, we wait for opportunities to neutralise our exposure to fixed income. 

February marked one year since the Russia invaded Ukraine. Is the conflict still shaping the landscape for investors?   

The war has been unexpectedly long and, at the moment, there’s no clear end in sight. As Spring approaches, the conflict seems to be entering a potentially new phase, as western allies continue to scale up support for Ukraine, while there appear to be no signs of retreat from Russia. In the short term, any escalation of the conflict would be bad for risk assets and geopolitical stability.

Last year, the conflict drove an energy crisis in Europe, and sanctions restricted the flow of key commodities from Russia – the impact of that crisis is still playing out today. Energy prices have come down from the highs of last year are likely to remain volatile over the medium term. Notably, Europe is still looking to transition its energy supply at pace, away from Russia and towards other sources, including renewables.  

So, while the outcome and long-term impact of the war is still being decided, it’s clear that it has fundamentally altered where parts of the world get their energy and commodities, which has a knock-on impact on trade, economies, and geopolitics.  

The UK and the EU agreed a new Brexit deal at the end of the month. What – if anything – does this mean for investors?  

It’s an interesting one. Surveys show that global investors have been consistently underweight UK equity markets for some time now – the complexity of Brexit, political dramas, and the makeup of the stock market are all reasons why global investors have shunned the UK.  

A key part of the post-Brexit vision is to change that perspective – which is why even the Prime Minister has been trying to persuade high profile companies, such as chip designer Arm, to list its shares in the UK rather than overseas. It’s telling that the firm ultimately decided on a US-only listing this year.  

At Nutmeg, our portfolios have a home bias towards UK stocks, but we are also marginally overweight large-cap UK equities (that’s constituents of the FTSE 100) at the current time, given their attractive valuation metrics and bias towards economic sectors such as energy, commodities and financials. We also have exposure to the FTSE 250 in our portfolios, which contain more dynamic, domestically focused mid-cap companies that we believe have a role to play in client portfolios.   

What are you and the investment team looking out for in the month ahead?  

We’ll be keeping a close eye on economic data, particularly around inflation. At the end of March, central banks in the US, Europe, and the UK will meet to decide whether they increase interest rates again, so we’ll be monitoring this very closely as well.

On 15th March, the UK chancellor will deliver his Budget – we’ll be watching this and providing analysis of what it means for you on our Nutmegonomics page, so keep an eye out for that as well.  

The Nutmeg investor update is available as a podcast. Listen to this month’s update below.

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About this update: This update was filmed on 7th March 2023. All figures, unless otherwise stated, relate to the month of February 2023. 

Source: MacroBond, Nutmeg and Bloomberg.  

Risk warning 

As with all investing, your capital is at risk. The value of your portfolio with Nutmeg can go down as well as up and you may get back less than you invest. Past performance and forecasts are not reliable indicators of future performance.