In the Bank of England’s own words, the outlook for the UK economy is “very challenging”. Inflation is the highest for 40 years, mortgage rates have spiked, interest rates are rising, there is an energy crisis caused by a war in Europe and the UK economy is about to enter recession.

However, we must remember that equity markets are discounting mechanisms and although the FTSE All-Share has been relatively resilient this year, especially compared with overseas indices, there has been a significant divergence in performances within the market. The largest companies in the UK market have performed well, such as those in oil & gas, mining, tobacco and defense sectors, while smaller more cyclical companies have fallen significantly. Valuations in this part of the market are starting to look attractive on a long-term view. While in the short term there could be further downside to equities as profit forecasts are adjusted downwards to reflect the weakening economy, it feels that markets maybe closer to the end of the bear market than the beginning, especially if inflation and interest rates are close to peaking.

Throughout the year the Trust has lowered gearing and increased the bond exposure while the equity portfolio has maintained a bias towards defensive and more resilient businesses. More recently, however, the cyclical exposure has slowly been increased, buying high-quality businesses or where the valuation appears to already be discounting a too bearish economic outcome.

While the outlook is uncertain, the Trust is more focused on finding further opportunities in cyclicals where valuations are particularly compelling, remembering that share prices historically trough before economies do.