The first quarter of 2023 started so well with a buoyant January and early February, before some wild moves in the bond markets knocked the stuffing out of the rally and markets retraced to end-year levels.

More recently, equity markets have steadied again but the mood has turned sour with the collapse of Silicon Valley Bank and subsequent enforced takeover of Credit Suisse.  The ‘surprise’ feature has been the resurgence of the NASDAQ, which has gained 12% over the year to date, as the major technology companies shone.

The Esk Fund does not have exposure to any secondary/regional banks.  We hold Morgan Stanley in America, Sumitomo Mitsui Financial Group (SMFG) and Nomura Holdings in Japan.  Morgan Stanley and SMFG are flat over the year to date, both had been up quite markedly, Nomura Holding is a new position that we are just building up.

The principal detractors to performance over the quarter (the Fund is up 5% year-to-date) have been two of our major Pharmaceutical holdings, Johnson & Johnson and Roche HoldingJ&J sank after a federal appeal court ruled that it may not use corporate bankruptcy laws to speed up the progress of lawsuits against its baby powder, while Roche profits missed expectations, continuing a run of poor form from them.  Both stocks are looking lowly rated and great long-term value at current levels.  Nordson reported (uncharacteristically) dull Q1 figs along with a reduction in their forecasts for the year and their stock fell 10% over the period. 

The positive contributions came in a number of areas, notably among the Consumer Discretionary and Technology holdings, but there have been a few other notable moves.  Shin-Etsu Chemical jumped 27% as they reported strong figures and raised their full-year guidance.  Two of the smaller Pharmaceutical and Healthcare holdings, Lonza Group and Straumann Holdings both gained around 20% after encouraging earnings reports, while our biggest holding in the sector, Stryker Corp, gained 14% after saying that they expect to see good momentum in 2023.  The Staple Goods companies all produced positive performance, but the feature was L’Oréal, which gained 20% after good figures.

In the Consumer Discretionary area, luxury led the way with gains of more than 20% for Hermès and LVMH, we have reduced the Hermès holding a shade following its strong gains from last summer, and Sony Group also gained in double digit percentages.  The Technology holdings saw gains across the board though Ansys was a particular feature gaining more than 30% after robust results and strong full-year forecast, Alphabet, Apple and Microsoft all recovered over the quarter, most recently being seen as a ‘safe haven’ away from the banks.

Equity markets are in a febrile state, desperately looking for any further problems in the banking sector and unsure as to central bank actions now.  All the focus was on inflation and the likely trajectory of interest rates, but this is now taking a back seat to a perceived bank crisis.  We do not think that this is a credit event for the banking system as a whole and certainly not for the majors, but it is not possible to rule out further shock waves.  But there is no doubt that the events of the past couple of weeks have served to tighten credit conditions further (the banks were tightening their lending criteria anyway) so it may be that the central banks’ job has been done for them and we are now at or close to peak rates.  We shall see.

The above article has been prepared for investment professionals. Any other readers should note this content does not constitute advice or a solicitation to buy, sell, or hold any investment. We strongly recommend speaking to an investment adviser before taking any action based on the information contained in this article.

Please also note the value of investments and the income you get from them may fall as well as rise, and there is no certainty that you will get back the amount of your original investment. You should also be aware that past performance may not be a reliable guide to future performance.

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