Fortem Capital Alternative Growth Fund

UK & EU – For professional and institutional investors only
Switzerland – this is an advertising document for professional and institutional clients as defined by the Swiss Financial Services Act only

Monthly Commentary – 31st December 2021

December was a very strong month for risk assets largely as a result of data emanating
from South Africa, and later the UK, suggesting that Omicron carried a significantly lower
risk of serious illness than previous variants. In spite of the positive data, the policy
reaction in a number of countries meant that there were still headwinds for many service
businesses to contend with, an all too familiar tale. Growth projections were revised
down heavily whilst inflation concerns remained, flattening the yield curve once again as
more rate hikes were priced into the front end of the curve as longer term inflation
expectations came down at longer maturities.

Inflation remains the key concern for policymakers and investors alike. In December, the
YoY inflation rate in the US hit 7.0% whilst the continued issues with Russian pipelines
deepened Europe’s energy crisis, adding to its own inflation woes.

The Fund returned -0.45% over the month.

The major drivers were the long rates volatility strategies, which suffered as volatility
collapsed due to investors flocking into treasuries after the Omicron variant came to light.
Rates volatility sits at historically low levels, which makes sense given that there has been
a guaranteed buyer in the market for over a decade. However, if central banks are true to
their word and quantitative tightening is on the horizon, the guaranteed buyer will
disappear at the same time as huge infrastructure spending requires financing through
further Treasury issuance.

The Fund’s more defensive strategies were also a drag during the month.

2021 was another stellar year for risk assets; the MSCI World Index returned a net 21.8%,
and has annualised at 20% over the past two years, in spite of a global pandemic.

The Fund returned -0.9% over the year, and is up 1.1% over the past two years.

It is looking possible that the Omicron variant may bring about an end to the pandemic in
its restrictive sense; its sheer infectiousness means that it is crowding out other more
dangerous variants. Countries such as Australia, New Zealand and China which, likely to
their overall detriment, have managed to largely keep omicron out, must decide when, not
if, they accept the inevitable. The world is going to get omicron, it is unavoidable.

Whilst clearly good news from a human standpoint, what it would mean for markets is
much more uncertain; the incredible rise in both bonds and equities seen since the
pandemic has, without question, been driven largely by the incredible support offered by
central banks around the world. One should remember that, immediately before the
pandemic, central banks had begun to tighten, or to normalise policy, having already been
incredibly accommodative in the post-GFC era.

If Omicron truly does signify the end of a restrictive pandemic that requires support,
there is much more to unwind now than there was then, and much further for parts of the
market to potentially fall.

Central banks have managed to keep the show on the road remarkably well, largely down
to the ability to keep rates floored and liquidity high. This is why inflation is the key issue;
if secular inflation removes the central banks’ ability to keep the current liquidity cycle in
perpetual motion then investors should prepare for extreme volatility.

The pandemic has been incredibly good for risk assets, it must stand to reason that there is at least a chance that its end may not be.

Total Return 2021 Dec
UK 100 18.4% 4.8%
US 500 28.2% 4.5%
Europe 50 23.3% 5.8%
Japan 225 6.3% 3.6%
Hong Kong 50 -11.9% -0.3%
US 2000 14.8% 2.2%
Swiss 30 23.7% 5.9%
BCOM 27.1% 3.5%
US Treasury -1.5% -0.3%
FTSE EPRA 28.3% 3.8%
PGF 7.7% 2.0%
AGF -0.9% -0.5%
Real Estate 24.1% 3.3%
US Equity Income n/a 4.5%


– This document has been issued and approved as a financial promotion by Fortem Capital Limited for the purpose of section 21 of the Financial Services and Markets Acts 2000. Fortem Capital Limited registration number 10042702 is authorised and regulated by the Financial Conduct Authority under firm reference number 755370.
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