Financial markets have spent the last eighteen months looking over their shoulder for new and potentially more dangerous Covid variants. The arrival of the more transmissible Omicron in late November initially looked like it may herald what many had feared. Governments responded by putting restrictions in-place and activity sagged. Yet despite soaring infection rates and a pick-up in hospitalisations, deaths have remained low. Investors interpreted this as the ‘market clearing event’ that facilitates the transition to a more normalised environment. Equity markets rebounded and the FTSE All-Share reached its highest level since before the pandemic. The fund returned 4.9% in the month versus the MSCI UK that returned 4.7%

The minutes of the December Federal Reserve Board showed participants believed that higher inflation and a tight labour market could necessitate lifting short-term rates “sooner or at a faster pace than participants had earlier anticipated.” Officials also now expect to end the expansion of the Fed’s balance sheet in March. The practical impact of these moves is limited but the ‘signalling’ effect is more significant and has driven a sharp rotation out of ‘growth’ stocks into ‘value’. Despite the initial intra market volatility, monetary conditions are not about to dramatically tighten. Investors will, however, need to navigate the transition from a liquidity driven bull market to one driven by earnings. Volatility has increased and the recent sector rotation will likely continue. But with a strong underlying global economy and significantly negative real interest rates the equity bull market is intact.

The emerging consensus that Omicron, while more transmissible, is considerably less virulent positively impacted numerous sectors. Increased confidence in the economic outlook drove a recovery in cyclicals. Travel related stocks bounced strongly as confidence grew that the worst of any Covid disruption was behind us. Ryanair, Easyjet and Menzies all rose. Jadestone Energy jumped as the company announced it had achieved its year-end production target. Sentiment towards the shares was boosted further by the passing of legislation in New Zealand that will likely facilitate the completion of the much-delayed acquisition of assets from OMV. Pantheon moved higher as it successfully completed an oversubscribed financing that will enable to complete its very promising drilling campaign.

Savannah Energy gained as the shares restarted trading post the announcement that it was acquiring a package of upstream and midstream assets in Chad and Cameroon from Exxon and Petronas. The transaction more than doubles the group’s reserves and generates significant cashflow at prevailing energy prices, enabling a quick paydown of the associated debt. The tail-risks of operating in Africa are material but the upside is significant, and the deal highlights the opportunities for smaller energy companies as the ‘majors’ navigate the energy transition. Energy demand will continue to grow and barring the emergence of a new scalable resource such as nuclear fusion, hydrocarbons will remain an integral part of the solution for the foreseeable future.  Micron climbed after results came in ahead of expectations and management expressed confidence in the outlook for memory pricing.

Synthomer was the largest detractor from performance. The shares slumped as brokers raised concerns over the outlook for the synthetic rubber glove market. We believe a more regular market is already factored into market expectations but unfortunately this will only become apparent with time. Even if conditions prove to be weaker than anticipated the company is more diversified than it has been in the past and the valuation attractive.

Financial markets have spent the last eighteen months looking over their shoulder for new and potentially more dangerous Covid variants. The arrival of the more transmissible Omicron in late November initially looked like it may herald what many had feared. Governments responded by putting restrictions in-place and activity sagged. Yet despite soaring infection rates and a pick-up in hospitalisations, deaths have remained low. Investors interpreted this as the ‘market clearing event’ that facilitates the transition to a more normalised environment. Equity markets rebounded and the FTSE All-Share reached its highest level since before the pandemic. The fund returned 4.9% in the month versus the MSCI UK that returned 4.7%

The minutes of the December Federal Reserve Board showed participants believed that higher inflation and a tight labour market could necessitate lifting short-term rates “sooner or at a faster pace than participants had earlier anticipated.” Officials also now expect to end the expansion of the Fed’s balance sheet in March. The practical impact of these moves is limited but the ‘signalling’ effect is more significant and has driven a sharp rotation out of ‘growth’ stocks into ‘value’. Despite the initial intra market volatility, monetary conditions are not about to dramatically tighten. Investors will, however, need to navigate the transition from a liquidity driven bull market to one driven by earnings. Volatility has increased and the recent sector rotation will likely continue. But with a strong underlying global economy and significantly negative real interest rates the equity bull market is intact.

The emerging consensus that Omicron, while more transmissible, is considerably less virulent positively impacted numerous sectors. Increased confidence in the economic outlook drove a recovery in cyclicals. Travel related stocks bounced strongly as confidence grew that the worst of any Covid disruption was behind us. Ryanair, Easyjet and Menzies all rose. Jadestone Energy jumped as the company announced it had achieved its year-end production target. Sentiment towards the shares was boosted further by the passing of legislation in New Zealand that will likely facilitate the completion of the much-delayed acquisition of assets from OMV. Pantheon moved higher as it successfully completed an oversubscribed financing that will enable to complete its very promising drilling campaign.

Savannah Energy gained as the shares restarted trading post the announcement that it was acquiring a package of upstream and midstream assets in Chad and Cameroon from Exxon and Petronas. The transaction more than doubles the group’s reserves and generates significant cashflow at prevailing energy prices, enabling a quick paydown of the associated debt. The tail-risks of operating in Africa are material but the upside is significant, and the deal highlights the opportunities for smaller energy companies as the ‘majors’ navigate the energy transition. Energy demand will continue to grow and barring the emergence of a new scalable resource such as nuclear fusion, hydrocarbons will remain an integral part of the solution for the foreseeable future.  Micron climbed after results came in ahead of expectations and management expressed confidence in the outlook for memory pricing.

Synthomer was the largest detractor from performance. The shares slumped as brokers raised concerns over the outlook for the synthetic rubber glove market. We believe a more regular market is already factored into market expectations but unfortunately this will only become apparent with time. Even if conditions prove to be weaker than anticipated the company is more diversified than it has been in the past and the valuation attractive.