What a difference a year makes.

2023 started in fairly spectacular style as risk assets across the board enjoyed a month of high optimism and returns.

December’s inflation numbers continued to slow whereas data turned more positive causing investors to assign a higher probability to a soft landing, and the whispers are now that a recession may even be avoided altogether.

The Fund had a similarly buoyant month, increasing by 5.1%.

Within the Fund’s underlying indices themselves, the reversal of a trend that characterised 2022 was of some note; the FTSE 100 Equal Weight Index, that lagged its market cap weighted sibling so significantly in 2022, outperformed as markets priced in the prospect of lower rates. On the other side of the world the Hang Seng, which was the subject of a number of issues topped by the ill-advised and fundamentally unachievable ‘zero Covid’ policy, has enjoyed a period of significant growth as it has become clear that Beijing have abandoned it entirely and will allow Omicron to blow through the population and reopen in earnest.

There were four observations during the month, with one investment calling.

The maturing investment, which was linked to the FTSE 100 & EuroStoxx 50, called at the end of the third year of its life, paying out its full return of 21.3% (7.1% x 3). The proceeds were reinvested in an investment linked to the Russell 2000 & EuroStoxx 50, with an annual return of 9.0%, illustrating that terms remain attractive against the environment into which the Fund launched.

Also of note is the increase in the protection levels afforded to investors after the recent rally. There is currently over 34% on average before capital is at risk, and over 32% before investments would not pay out their full growth amounts.

Despite the levels of protection increasing significantly, the Fund retains a high GRY of 9.9% in the event markets return nothing, whilst if markets were to fall 20% from here, the terminal payoff of the existing investments is +34.5%. Those returns are contractually stipulated and in effect locked-in provided the underlying indices satisfy their conservative final barriers.

The market is increasingly confident that the Federal reserve have managed to orchestrate a soft landing. Whilst this might be the case, purely on the balance of probabilities it is less likely than the other outcomes of a hard landing or the need for higher rates for longer. Anecdotally, they have never in their history managed it before. Investors should note that in all previous rate rise cycles, soft landing type conditions have been experienced, after all, you need to at least pass through those types of conditions before heading elsewhere. Let us hope we have reached our final destination.