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In this month’s investor update, director of investment strategy Brad Holland answers questions on the earnings reporting season and its impact on markets, and recent changes to the Nutmeg portfolios which have seen us ‘neutralise’ our positioning in bonds. 

What impact did the ongoing earnings season have on market returns in April? 

The earnings reporting season for the first quarter of the year began in mid-April with the bulk of reports coming later in May, not April. Earnings growth was negative for the second consecutive quarter, but the declines were generally less than markets had anticipated giving rise to positive surprises from the get-go. This followed on the heels of a strong equity market recovery from the low point in March, so the tone of the equity market had already improved before earnings reporting season began.  

Tech companies and large banks were among the early reporters to offer positive sales and profit surprises. Ironically it was the failure of some smaller banks that led to some equity market volatility in the second half of the month, not the broader earnings reporting season.  

Despite that though, equity markets generally finished higher on the month with UK a particularly strong performer. Bond markets had a more mixed time with small positive gains in US bonds and larger losses in UK government bonds.  

Unusually the stronger UK large company returns came with a stronger currency. But the UK performance was across both large and smaller companies, indicating a broader re-rating of the UK market. 

Did you make any changes to the Nutmeg portfolios in April? 

Yes, at the end of the month we made a decision to ‘neutralise’ the portfolios’ positioning in government bonds. In other words, we are no longer underweight bonds versus our risk benchmarks, as we see better prospects ahead for the asset class.  

We’ve spoken before about how 2022 was a year to forget for the global bond market as the world’s major central banks raised interest rates in a bid to control inflation. Rising interest rates mean the value of bonds fall, which can inflict losses for those that invest in them – including Nutmeg portfolios. 

Nutmeg portfolios have historically stayed underweight bonds amid the spill-over effects of a decade of extreme policy actions; most recently governments leant support to bond markets during the Covid pandemic. 

However, as we move deeper into 2023 there are more encouraging signs for the global bond market; namely with evidence building that inflation may have peaked.  

Can you talk more about these changes to bond positioning, and the reasons behind the shift? 

US government bonds have been our first port of call, with the inflation outlook there seeming much clearer than in the UK.  

Policy makers at the US Federal Reserve expect core inflation to fall to 3.6% by December 2023 and then to reach 2.1% by 2025, consistent with inflation starting to trend lower in the coming months. 

The US economy is now in the later stage of its monetary policy tightening cycle, with the bulk of the heavy lifting in interest rate rises behind us – though, saying that, we still don’t foresee a cut in rates later this year.  

We think that the recent issues impacting the banking sector in the US has provided another reason for policy makers to tread carefully about raising rates further. The concern is that if banks become more cautious about their balance sheets, they may tighten up their lending standards and do some of the central banks’ job for them. 

What are the benefits of investing in government bonds, compared to equities and other risk assets which may deliver better returns? 

Well diversified multi-asset portfolios, such as those offered by Nutmeg, should hold healthy positions in both fixed income and equities.  

Along with a steady yield-based income, government bond assets typically offer investors a source of diversification given they tend to be negatively correlated with global stock markets. While that wasn’t the case in 2022, long-term history suggests that bonds can offer ballast in portfolios as a more stable, less risky asset class.  

With interest rates now back to attractive levels, investors are being better compensated for bond risks and with more normal correlation with equities, the diversification factor of government bonds is once again effective.  

You can read more about the changes to the portfolios in a fresh blog posted on the Nutmegonomics section of our website.  

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 recorded on 9th May 2023. All figures, unless otherwise stated, relate to the month of April 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.