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QD view – (half) year in review

Our review of the investment companies sector for the second quarter of 2022 went live this morning (you can read it here) and apart from a few turnarounds in performance for some sectors with specific reasons, it was very much a continued story from the first quarter (check out our 2022 Q1 review here).

However, when looking at these two quarters combined and therefore the first half of the year, we see a very different picture to recent periods before it.

For the investment trust world, a notable difference would be the distinct lack of IPOs so far this year. This comes after last year enjoyed seven new issues by the half-way point and 21 for the full year, raising gross proceeds of about £4bn at launch (a further £1.1bn was raised from the new additions plus around £11.6bn of net new money from existing funds in the secondary market).

The only names that have gotten close to launching this year were GCP Co-Living REIT and Cordiant Global Agricultural Income, both back in Q1, but put the brakes on their plans as market conditions proved difficult for new entrants. GCP Asset Back Income, which was to provide the seed assets for GCP Co-Living, is now exploring other avenues to dispose of its co-living assets, so this REIT definitely won’t be coming to market.

Interestingly, despite a challenging backdrop, 2022 H1 saw the third-highest amount of fundraising in the secondary market during the first six months of a year at £4bn, according to the Association of Investment Companies.

The renewable energy infrastructure sector led the way, raising £1.2bn, followed by Infrastructure with £621m and property – UK commercial with £557m.

Infrastructure trust International Public Partnerships raised the most with £326m in May, followed by Supermarket Income REIT with £307m in April.

Looking at the past decade, the final six months of the year tend to be more active in the IPO arena. Of course, we can never predict what’s going to come but what we do know is that the stability of 2022 remains under threat with continued inflation woes and associated interest rises, which could tip the global economy into recession, coupled with supply chain crisis and of course the war in Ukraine.

These macroeconomic factors have been a defining feature of the first half of 2022 and have had or are still having a knock-on impact on global capital markets.

While inflation and interest rate concerns rumbled over 2021 following the pandemic, this year saw them firmly take hold and central banks perform the largest interest rate hike in decades.

In a move described as ‘countering the fastest pace of inflation in over 40 years’, the Federal Reserve lifted interest rates by 0.75 percentage points last month, the third hike this year and the largest since 1994.

Meanwhile, the Russo-Ukrainian conflict has been ongoing since 2014 but was significantly escalated at the end of February of this year when Russia invaded Ukraine, leading to Europe’s largest refugee crisis since World War II and a substantial hike in the price of oil and natural gas, while a number of other commodities have seen significant increases too.

The unfortunate events have impacted an array of investment trust mandates from those exposed to Russia (which saw investments listed on the Moscow Exchange valued at zero) to others exposed to big oil and coal importers such as India and Japan.

Then there has been the momentous shift away from growth-style investing. This started at the turn of the year in response to inflation and interest rate concerns and has seen once large players such as Scottish Mortgage suffer their worst performance in years.

Some may argue that there is plenty more to play for in areas such as technology, which continues to disrupt new sectors but looking at the figures for Q2, technology & media was the worst performing of all sectors with a loss of more than 20% in share price terms and 17% in NAV terms.

Looking ahead, the risk of stagflation across the developed world has increased, while central banks continue to signal that further interest rate hikes are on the way. Inflation looks set to stay high due to high commodity prices, supply chain bottlenecks, upbeat US wage growth and deglobalisation.

We don’t know for sure what’s coming next, and some negative outcomes are already at least partially priced into markets, but there’s much to suggest that rougher economic seas lie ahead.

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