Morning Note: Market news and an update from Capital Gearing Trust.

Market News

Global equity markets have steadied somewhat after their recent pullback on concerns over weak market breadth and AI fundamentals. Traders are now focused on results from Nvidia and the minutes of the last Federal Reserve meeting.

Last night, US equities posted their fourth straight decline – S&P 500 (-1.8%); Nasdaq (-1.2%). Big tech was mostly lower – one exception was Alphabet which rose following Google’s launch of Gemini 3. Nvidia and Microsoft are to invest up to $15bn in Anthropic. In Asia this morning, equity markets were mixed: Nikkei 225 (-0.3%); Hang Seng (-0.4%); Shanghai Composite (+0.2%).

Risk premiums on corporate and junk debt are near their highest in weeks, with investors pulling about 40% of orders after seeing final pricing.

Minutes from the Federal Reserve's October meeting are due today and will be parsed for a read on the dynamics of a divided committee, where members are arguing for differing policy responses to inflation and labour data. The market’s conviction in a December rate cut is waning, with CME's FedWatch showing a 43% chance versus a 62% a week ago. The 10-year Treasury currently yields 4.12%, while gold moved up towards $4,100 an ounce.

UK Inflation fell to 3.6% in October, the first drop in seven months, sending Sterling lower ($1.3140 and €1.1345). The data confirm the bullish outlook for gilts given that a Bank of England rate cut was already in play, according to MLIV. The 10-year gilt currently yields 4.55%, while the FTSE 100 is little changed at 9,551.

Source: Bloomberg

Fund Update

Yesterday Capital Gearing Trust released results for the financial half-year to 30 September 2025 which highlighted a resilient performance. The manager remains cautious on the medium-term outlook and the level of so-called managed liquidity in the portfolio remains high. The shares, which are listed in the FTSE 250 Index, remain on a small discount to NAV and the company continues to buy back its shares.

Capital Gearing Trust (CGT) is a closed-ended listed vehicle with a goal to preserve and grow shareholders’ real wealth over time. The strategy is managed by the investment team at CG Asset Management, led by Peter Spiller, Alastair Laing, and Chris Clothier.

The £800m fund is actively managed, without reference to a benchmark, with a total return mindset made up of capital growth and income. A cautious asset allocation aims to avoid losses and, as a result, the fund tends to lag during large equity market upswings. In 2022, for example, a year in which a 30/70 equity/bond portfolio fell by 11.4%, the fund NAV was only down 3.2%. More recently, during the ‘tariff swoon’, when global equities fell almost 20% in sterling terms in the two months ended 8 April 2025, the company’s NAV fell by just 2%.

The fund is made up of a global portfolio of equities, bonds, commodities, and alternative assets, which are split into three risk categories, the names of which were recently changed to better reflect and explain their role in achieving the investment objective. They are:

·       Managed Liquidity Reserve (formerly Dry Powder) – Cash and short-dated bonds that provide the Investment Manager with liquidity and optionality in uncertain markets.

·       Inflation-Linked Bonds (formerly Index-Linked Bonds) – These government bonds protect against inflation and are a key component of the capital preservation strategy.

·       Risk Assets (label unchanged) – Chiefly comprising listed investment trusts, ETFs, and property companies offering long-term growth potential.

Annualised performance since 2000 has been good: NAV (+8.2%) and share price (+7.3%) versus MSCI UK (+5.2%) and CPI (+2.6%). During the latest six months, the fund generated a NAV total return of 3.4%, slightly above the 2.1% CPI.

A majority of the recent returns came from Risk Assets (26% of the portfolio), with equities rebounding strongly after the tariff-induced weakness in April. Within the conventional equity investment trusts all markets delivered strong returns but particularly notable has been emerging markets and Japan. Fidelity Emerging Markets was a standout performer for the fund, delivering returns in excess of 30%. Overall, the equity investment trusts delivered a return of 13%. This was just below the sterling-denominated MSCI World index, which returned 14.9% over the period. This underperformance was largely a consequence of the company’s continued underweight to US equities. During the period, exposure to Risk Assets was reduced from 29% to 26%. The manager remains concerned about extremely stretched equity valuations, particularly in the US and increasingly speculative investor behaviour.

The bond portfolio delivered modest positive returns against a backdrop of rising yields and strengthening sterling. Across inflation-linked bond holdings (39% of the portfolio) headwinds and tailwinds offset one another. The US inflation-linked bonds (TIPS) profited from falling yields that were offset by the weakening dollar. The UK inflation-linked bonds profited from strong inflation accruals that were partly offset by a steepening yield curve. These improved yields motivated the manager to make the largest portfolio change in the period, with an increased allocation from 5% to 20% to UK “linkers”.

The Managed Liquidity Reserve (34% of the portfolio), made up of short-dated government bonds and credit, made steady returns in the period. The very high weighting to these low-risk assets is an expression of the manager’s concern about the outlook.

Looking forward, the manager views the medium-term outlook with caution with a long list of things to worry about. Chief among them is the fiscal position of developed market governments, in particular France, the US and the UK. The UK’s position is probably the most precarious. The US enjoys the exorbitant privilege of being the global reserve currency and France benefits from back-stopping by the ECB. Few need to own UK government debt. It is entirely plausible that any one of those countries (and several others) could suffer a fiscal crisis in the near future.

Bond markets have woken up to this. Yield curves have steepened dramatically as investors assess these risks and the higher returns needed to entice new buyers to buy the ever-greater supply of government bonds. Yet equity investors have shrugged this off, with high valuations set against a backdrop of high and rising macro-economic risks, in particular tariffs and circular financings being used to invest in AI infrastructure.

Against that backdrop the fund’s exposure to both equities and bonds is constrained. Where interest rate risk is taken, it is via inflation linked bonds. There is also a high weighting to cash-like assets within the managed liquidity reserve which offer reasonable returns. The manager believes the opportunity cost of not being invested in the market to be very low.

The share price total return of the listed vehicle (+4.3% during the last six months) is more volatile than the NAV, with larger drawdowns during periods of equity market weakness. CGT operates a zero-discount control policy (DCP) between a 2% discount to 2% premium. When the shares are trading at a premium, new shares are issued at a premium. When the fund is trading at a discount, as it is at present (2% on 17 November), the accretion from the share buyback programme helps to cover the fund fees.

Consistent with the experience of many investment companies, CGT has been required to significantly increase the rate of its share buybacks – £71.6m during the half-year – to meet the objective of the DCP, with the company likely to call a general meeting in the first quarter of 2026 to renew its buyback authority.

The company pays a dividend, with a 2% yield paid out last year. At the half-year stage this year, the receipt of income has fallen since last year, nevertheless the company is likely to again designate a proportion of the total distribution as an interest distribution. The final distribution recommendation will be announced with the full-year results in May 2026. The OCR was 0.56% last year.

Source: Bloomberg