North American Income Trust announced results for the year ended 31 January 2023. Over the year, NAV total return was 9.6%, outperforming the 8.5% total return in sterling terms for the Russell 1000 Value Index, the company’s primary reference index, while the share price total return was 12.4%. The discount at which the share price traded relative to the NAV narrowed over the year from 11.2% to 9.3%, although it has since widened to around 10%. While management was happy with the outperformance, it was noted that the absolute increase in the value of the portfolio can be ascribed to the strengthening of the US dollar by 12.2% year over year, which boosted the valuations on the balance sheet in sterling terms. By way of illustration, the Russell 1000 Value Index delivered a total return in US dollar terms of -0.4%.
The outperformance was attributable mainly to stock selection in the materials and real estate sectors although allocation was a small negative in the latter. The company’s performance relative to the reference index was hampered by stock selection in the consumer discretionary and energy sectors although allocation within those segments partially offset the negative impact.
Commenting on the results and the outlook, chair Dame Susan Rice noted;
“North American equity market indices fell significantly over the year ended 31 January 2023. A combination of higher interest rates and surging inflation caused North American share prices to fall sharply from early 2022 onwards. Overall, however, North American equities ended higher in sterling terms on a total return basis as the US dollar strengthened against the pound.
“The Federal Reserve (the “Fed”) accompanied its rate hike at the start of December 2022 with a slightly less hawkish message around future policy, a near-term positive for equity markets. Indeed, a majority of policymakers are now forecasting an easing in the pace of future rate hikes. Also, following major central banks’ rapid monetary tightening to combat high inflation, certain banks’ balance sheets came under severe pressure in March 2023 as the value of their fixed income portfolios fell and customers withdrew deposits. Technology-focused Silicon Valley Bank (SVB), as well as cryptocurrency-industry lenders Signature Bank and Silvergate Capital, collapsed. SVB’s demise was the largest banking failure since the Global Financial Crisis of 2007-2008. A consortium of US banks also injected $30 billion into regional lender First Republic Bank. In Europe, UBS mounted a $3.3 billion government-backed takeover of Credit Suisse after the latter ran into financial difficulties. These events, which led to major central banks boosting dollar liquidity to ease strains in funding markets, have caused fears of a global banking crisis and deep recession.
“While, as a result, investors have lowered their expectations of further monetary tightening, the Federal Open Market Committee remains determined to tame inflation, even if this comes at the cost of a recession. The continued strength of employment suggests that wage growth will continue to run at rates well in excess of those consistent with the Fed’s inflation target. The strength of wage growth has clearly contributed to surging services inflation, alongside very aggressive increases in rent measures and rebounding services demand as Covid-19 headwinds fade and in March 2023, the Fed increased rates again by 25bps as inflation hit 6% year-on-year in February. Your Manager’s view is that this will lead to further tightening by the Fed over the coming months as policy remains restrictive, adding to its conviction that the economy will enter a downturn in the middle of this year.
“So, what does this mean for equity markets going forward? Despite the recent rise in markets, sentiment has remained under pressure due to the ongoing banking crisis, hawkish Federal Reserve comments and further negative macroeconomic readings, with equity levels still materially lower than their recent peak. The economic outlook, both in the US and abroad, remains challenging and earnings downgrades have continued to come through since the end of the third-quarter earnings season. Nonetheless, US equity levels now appear to have priced in a strong probability of slowing economic growth and that inflation has peaked. On that basis, your Manager is now seeing some target companies trading on attractive multiples and increasingly appealing valuation points for long-term investors, such as ourselves, and has, therefore, become cautiously optimistic on the outlook for US equities in particular as an asset class.”
NAIT : Stock selection and USD returns boost North American Income Trust