February was very much a month of two halves for the markets. During the first half, investors were focused on interest rate hikes that would be delivered by the US Federal Reserve (Fed), Bank of England (BoE) and the European Central Bank (ECB) over the coming months and years. Expectations ramped up quickly due to a consensus building that central banks would look to get inflation under control at the cost of dampening growth. Inevitably, this led to continued outperformance of 'value' over 'growth' styles that we had seen since the start of the year until the mid-point of the month. The focus on interest rate hikes subsided quickly as markets were then absorbed by the threat of conflict in Ukraine. Given the uncertain and unstable geopolitical and macroeconomic situation, equity markets, as well as the fund, had a tough time.

Our first take on the ramifications of the conflict between Russia and Ukraine is that Western economies would increasingly cut ties with Russia and sanctions would be imposed, and Western governments did swiftly impose sanctions. Likewise, companies across the developed world sought to shutter Russian operations or stop delivery of their products and services to the country. Given that Russia supplies 13% of global crude oil production, 17% of natural gas production and nearly 10% of global wheat, the largest consequence of this conflict has been that commodity prices have rallied strongly. Most notably, Brent oil ended the month above $100 per barrel and European natural gas has risen 15% during the month. The knock-on effect of these moves, especially as finding a quick replacement for the Russian output is difficult, leaves us to conclude that both households and companies will see energy prices remain higher for longer. On the former, we continue to believe that households will, as we have written in the past, be more selective in deciding where they spend their hard-earned money. We remain of the view that the prioritisation of spend will stay on those activities/things that people were restricted from doing due to the COVID pandemic – notably travelling. For companies, higher energy prices will mean further increasing prices for products. Given the inflationary and troubled supply chain environment we have been living in for the past 18 months, passing on prices has been easier than in the past due to customers being desperate and companies trying to fulfil buoyant demand. However, we have recently become more concerned about those companies we hold in the fund where energy is a large portion of costs and the potential of demand destruction from ever increasing prices. What will matter now is the companies we hold showing they have true pricing power and offsetting what is likely to be another year of cost inflation with pricing.

Given our views, recent activity has been focused on our consumer-facing and energy intensive holdings. We decided to close our position in the Spanish clothing retailer Inditex and top up holdings in companies exposed to any travel recovery, such as Airbus and Amadeus. We trimmed our exposure to companies with large energy exposure, such as Holcim and Linde. In the second half of the month, as interest rate expectations cooled, we also reduced our position in select banks. We continued to build positions in companies that we had initiated in January such as Solvay and BESI.