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The manager’s report covers the impact of market changes on the portfolio and short-term performance of the fund.

31st December 2023

Market Review

The strength of world equity markets in the third quarter of the financial year took most investors by surprise. Increased optimism that interest rates had peaked and that they may be cut in 2024 was the predominant driver of markets. This followed data that showed that inflation was cooling in most areas of the developed world and economic growth remained robust.

Global markets gained 6.2% during the quarter with the US being the driving force behind this with the MSCI North America gaining 6.9%. The US Federal Reserve signalled that interest rate cuts may be on their way in 2024 after their preferred measure of inflation, the core personal consumption expenditure index, was softer than expected in November. Economic growth for the third quarter of the calendar year remained strong at an annualised rate of 4.9%. These data reinforced market expectations that the Fed had finished its rate hiking cycle and chairman Jerome Powell’s comments about being aware of the risk of keeping rates at restrictive levels for too long were well received. Long duration assets typically outperformed with technology, real estate and industrials amongst the top performing sectors. Energy lagged as crude oil prices declined despite concern about the Israeli/Hamas war igniting tensions in the Middle East.

Although slightly lagging behind the US, European equity markets also performed well this quarter with the MSCI Europe gaining 6.2%. Softer inflation figures supported investor expectations that there would be no further interest rate rises. Eurozone GDP fell by 0.1% quarter-on-quarter in Q3 with Germany looking particularly weak with the manufacturing PMI at 43 (anything below 50 signals contraction). The real estate sector advanced strongly having particularly suffered from higher interest rates earlier in the year. Technology stocks also performed well as artificial intelligence continued to be a driver for investors. The UK lagged the rest of Europe, gaining just 2.2%, with the high concentration of energy companies in its index acting as a laggard. Inflation dropped more than expected during the quarter but still remains higher than most of the rest of Europe at 3.9% in November. Sterling performed strongly against the dollar which also acted as a headwind. Japan was also weaker this quarter, gaining 3.5%, with the equity market proving to be quite volatile. Investors were initially worried that US interest rates would remain higher for longer and conflict in the Middle East would both have negative impacts on markets. However, sentiment improved as rate cuts in the US looked more likely but this was tempered by concerns about yen appreciation. The growth style outperformed value with small caps also broadly outperforming large caps. Macroeconomic conditions in Japan continued to improve with the Bank of Japan taking gradual steps to normalise its extraordinary monetary easing policy off the back of higher inflation. Progress also continues to be made with corporate governance improvements which both the government and central bank are strongly committed to.

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