Equity markets pushed higher in December, with global stocks rising 3.5% and 1.1% in US dollar and sterling terms respectively. Emerging markets were the strongest region, returning 7.5% over the month. Energy companies led the rally, followed by technology and materials stocks.

Major developed market 10-year sovereign bond yields rose between 10 and 20 basis points, creating a tough environment for safe-haven assets. Narrower credit spreads led to corporate bonds outperforming government debt. The US dollar weakened over the month, helping spur strong performance in emerging market currencies and the commodity complex.

Trade tensions with China remained at the forefront of investors’ minds. Rhetoric remained volatile and, at times, antagonistic. Whilst an actual trade agreement remained elusive, expected tariffs were not raised, and both China and the US indicated that significant progress had been made. Risk assets rallied on the back of the news as President Trump subsequently indicated that he expects a ‘Phase 1’ deal to be signed in mid-January.

The UK election resulted in a substantial win for the Conservative Party, which regained control of the House of Commons. Sterling rallied strongly on the result, and ended a long period of political gridlock for the UK Parliament. However, the currency bounce was immediately checked by a decision to rule out any extension to the agreed Brexit transition deal beyond the end of 2020. This leaves a year to negotiate a complex trade agreement, a period viewed by many as unrealistic.

December finished off an exceptionally strong year for global markets as almost every asset class produced strong returns. Most major credit markets produced double-digit returns, aided by the solid returns in sovereign bonds. This was perhaps surprising against a backdrop of recession fears and political uncertainty, but markets started from lower valuations following a difficult end to 2018. While monetary policy stimulus and falling bond yields drove equity valuations higher early on, tentative signs of a bottoming in economic data and US-China trade deal progress helped to further improve sentiment later in the year.

Performance and activity

During December the Company’s Net Asset Value (NAV) rose 2.0%, the share price fell 1.0%, and the Company’s Association of Investment Companies (AIC) Flexible Investment peer group returned 0.6% in share price terms (source: Morningstar). The FTSE World Total Return Index, which the Company aims to outperform over the long-term, returned 0.8% in sterling terms. The Company’s NAV rose 3.9% % for the year to end December 2019.

The most significant contributions to positive performance came from the Company’s holdings in our Baring Vostok private equity fund, the KLS Sloane Robinson Emerging Markets fund, and our holding in Sigma Capital plc. The Baring Vostok fund performed strongly due to a well-received share buyback, the KLS Sloane Robinson vehicle performed in line with its exposure to emerging markets, which rallied strongly in December, and Sigma Capital announced that it expected its 2019 results would be in line with market expectations.

Negative performance contributions came from our investments in the quoted litigation funding business Burford Capital and our long term investment in Ceiba Investments Ltd. Despite a number of recent positive developments, investor sentiment on Burford remains challenged following the highly damaging and well reported ‘short attack’ on the Company’s shares earlier in 2019. Ceiba’s liquidity, and its share price, has been impacted by a September 2019 ruling from the US Office of Foreign Assets Control (‘OFAC’) which suspended a general licence authorising certain monetary transactions involving Cuba.
Post the UK general election, we added to our infrastructure exposure with trades in HICL Infrastructure and International Public Partnerships. We also added to Oakley Capital Investments. We reduced our exposure to Urban Logistics following strong performance and participated in the Baring Vostock buyback.

Glossary

Yield: The level of income on a security, typically expressed as a percentage rate.

Sovereign bond: sold by governments to investors to raise money for government spending

Sovereign bond yield: the interest rate paid on a government (sovereign) bond.

Bond yield: the return an investor realizes on a bond

Net asset value (NAV): The total value of a fund’s assets less its liabilities.

Liquidity: The ability to buy or sell a particular security or asset in the market. Assets that can be easily traded in the market (without causing a major price move) are referred to as ‘liquid’.

Monetary policy: The policies of a central bank, aimed at influencing the level of inflation and growth in an economy. It includes controlling interest rates and the supply of money.