It has been another tough quarter as the summer rebound gave way to further selling, leaving the market indices and my portfolio currently near their lows for the year. This is unsurprising given the macro outlook. Even as the economy is showing signs of weakening, there is little sign of inflation dissipating yet and most central banks are rapidly tightening interest rates. The inauspicious launch of Trussonomics has added to the general turbulence, causing UK interest rates to rise and causing some concern for mortgagors like me.

My appetite for crazy policies had already been sated by the shenanigans of the last few years, so the reckless UK ‘Mini-Budget’ left me with indigestion. The announcement of unfunded tax cuts, and what appeared like an end to any semblance of fiscal discipline, both cut across the central bank’s goal of curbing inflation and lacked appreciation for the importance of retaining the confidence of the financial markets, particularly following the fiscal excesses of the Covid-fiasco and the reliance of the UK economy on cheap debt. It’s an astonishing turn of events that seems to have unnecessarily caused a great deal of economic and political instability.

While the UK leadership change has caused chaos, the main thing driving markets at the moment seems to be the question of if and when central banks, and in particular the Federal Reserve, will ‘pivot’ to lower interest rates as fears shift from inflation to a weakening economy. It seems inevitable that this shift will happen at some point. When it does, it should be beneficial to equities and growth stocks in particular. However, if the economy is already facing deep recession by the time the Fed is happy that inflation is under control, the damage may already have been done. I’m not sure when a pivot might come or whether it might already be too late but it feels increasingly likely that we may be in for a hard recession. More volatility ahead seems likely.

I made one trade in September, selling Sartorius Stedim Biotech and buying AB Dynamics. I got cold feet with Sartorius after a day of heavy selling made me think hard about its high valuation and decelerating growth. Around the same time AB Dynamics updated that it was ahead of expectations. AB Dynamics appears to be regaining some of its momentum following a Covid-induced rough patch. I have made a couple more trades in October that I will update on in a subsequent post.

Performance

The performance of my portfolio (QSS) is shown against its benchmarks in the table below. My main benchmarks have been the FTSE 100, the S&P 500 and a portfolio of the top decile of UK shares according to their Stockranks. I’ve also continued to benchmark my portfolio against a handful of professional fund managers I rate highly.

My performance this quarter was basically flat, so while much better than last quarter where it suffered a double digit fall, nothing worth getting too excited about. I beat most but not all of my benchmarks as there was some respite to the underperformance of growth against value.

Year to date my portfolio is down 25% and the possibility of salvaging a positive performance this year is looking very remote. Over a longer five year period I’ve now been overtaken by some of my benchmarks, such as Fundsmith. This is a little disappointing but with a little patience I’m confident that my portfolio can regain its mojo. I think the key thing at the moment is to keep a clear head. This is a difficult time for investors to navigate with ample opportunity to make or lose a lot of money.

Strategy

With high inflation, looming recession, high levels of debt and a lot of scope for historic errors by governments responding to these threats, the macro situation looks bleak. This is not necessarily a bad time to be invested in the stock market as the outlook will often look bleakest near the bottom. It doesn’t really feel like we are that near the bottom but I am hopeful that we are not too far off. At any rate I think it is a bit late for raising more cash. So having reinvested my remaining cash a couple of weeks ago when I was more optimistic that the market had found the bottom, it now looks like I’m on for the ride.

On the plus side, there may be some light at the end of the tunnel for quality growth stocks if fears of inflation and the Fed eventually pivots as the market seems to expect. These have been performing better of late, defensive stocks in particular. I’m reasonably happy that my portfolio is well positioned, albeit slightly uncomfortable at being fully invested.

The main question I am grappling at the moment is whether and how to adapt my strategy to the stock market crashing and then rebounding. The ideal approach is to focus on momentum and defensive stocks before the bottom is reached and then to shift decisively to the stocks that have fallen the most at the bottom. Obviously the problem is that it’s not possible to tell where the bottom is until sometime afterwards. I’ve been trying to make my portfolio a bit more defensive in recent months and am happy with the current positioning. I think the best approach for me is to stay defensive and not be too keen in trying to pre-empt the bottom. However, I will keep an eye on my favourite shares that have fallen a lot and may start taking small bites if the market crashes further from here and valuations start to get really tempting

Individual shares

Below is a quick review to identify candidates where my current conviction is highest to reinvest my cash balance when the time comes, as well as weaker positions to swap should other opportunities arise.

SDI (7.0%): the stars seem to be aligned for SDI at the moment. There is not much news since my last update other than a brief AGM statement that everything is on track. Momentum for SDI is relatively good and the price seems to be turning up again after finding a bottom in July. The valuation seems cheap given the growth potential. I’m keen to continue adding to my position here.

Bioventix (6.7%): I had been hoping for some time that Bioventix would benefit from recovery from the effects of lockdown, growing Troponin sales and a weakening Pound, so it was reassuring to see its recent update that it was trading ahead of expectations. Hopefully this momentum should continue leaving the share price looking pretty good value. Bioventix also seems like a relatively safe defensive investment to hold through any impending downturn. I added to my position following the recent trading update and could probably be tempted to add more.

Xpel (6.7%): it has been a bit of a rollercoaster for my fairly recent investment in Xpel. I was fortunate enough to buy in near the lows and was stunned to see the share price almost double in just over a couple of months. It has fallen back quite a bit since then but I am still sitting on a healthy gain. The last results were very good with little sign that any macro headwinds were getting in the way of Xpel’s growth plans. The price seems very reasonable given the growth potential but the business could be a bit cyclical so I am ambivalent about adding more to this investment.

FICO (5.7%): I invested in Fico fairly recently. Since I invested Fico’s last results were good and the share price has taken a round trip, rising and falling with the wider market. I think of Fico as fairly bullet-proof to the wider macro risks. It is somewhat cyclical but has enough pricing power to make healthy profits throughout the cycle. The valuation seems too cheap to me at the moment given the quality of the business so I have taken the opportunity to build a fairly significant holding, though I’m probably not going to add much more for now.

Judges Scientific (5.0%): Judges announced that it was ahead of expectations at its interim results in September, with its new acquisition Geotek performing particularly well. It warned that supply chain and inflation issues were increasing but were offset by a weak Pound. Hopefully the latter will outlast the former. The share price has fallen along with the wider market since these results leaving the shares looking better value. I have long term conviction in the business and would be happy to add more.

Intuit (4.6%): trading at Intuit continues to be strong, though the share price has fallen, along with the rest of the stock market, back to near where I first bought. One advantage it has over some other US-listed shares is that has a small proportion of non-US sales affected by the stronger dollar. I am pretty confident in Intuit’s prospects from here, though it is not completely immune from a recession. The valuation seems reasonable. I am happy with the size of my current holding.

Copart (4.5%): as mentioned in my last review, I’ve been becoming increasingly attracted to Copart the more I find out about it and have been adding to my position. I am unsure how badly it might get affected by recession but it should be fairly resilient. The last results were good but for some pressures on Copart’s margins. I’m happy with the size of my holding for now.

Lululemon (4.4%): Lululemon’s last results at the beginning of September were excellent. The share price has struggled to make headway in spite of this as sentiment has understandably turned against retailers. I think this could be a buying opportunity for Lululemon but am ambivalent as the shares could well get beaten up regardless of how well the underlying business is performing if we are hit by a severe recession. I have added to my holding but am now happy it is large enough.

MasterCard (4.0%): there is not much new to report on for MasterCard. The share price has performed relatively poorly over the past quarter, which I guess makes sense if concerns are turning to recession and given the strong dollar. I have conviction in the medium term prospects and the valuation is very reasonable so I’m not in any hurry to sell but I wouldn’t add here at the moment.

Beeks Financial Cloud (3.8%): I was adding to my position in Beeks at the time of the last update as I felt the share price has been unfairly punished due to low liquidity. The share price hasn’t made a lot of progress since then but Beeks interim results were encouraging, though perhaps less concrete than some were hoping for. Beeks is in the high growth, less profitable stage of its development and as such is naturally more speculative than my normal investments. I’m fairly confident in the business model and the management but have been having some doubts about whether I should be invested where there is more of a question mark over the long term quality of the business. I am happy to give it the benefit of the doubt for now but this could be a candidate for chopping should a better opportunity arise.

London Stock Exchange (3.8%): LSE’s half year results were steady-as-she-goes. I’m happy to continue to hold as a resilient long term investment.

Calnex (3.6%): there is little new to say for Calnex. It’s AGM statement back in August said that it was trading in line with expectations and the share price has slowly drifted down over the summer. I’m happy with my current position.

Alpha FX (3.6%): Alpha FX is an interesting situation as trading seems to be going very well but the share price hasn’t responded accordingly. Alpha FX’s interim results in September were very strong and a more recent update from Argentex suggested that demand for corporate FX services was very strong at the moment, which hardly seems surprising. I’m optimistic that Alpha FX will continue to beat expectations. However, I’m not confident enough in the long term quality relative to my other investments to buy more shares.

Fope (3.6%): Fope is a new holding bought over the past month that I am yet to write up. It is a small but highly profitable luxury jewellery designer that has popped up on my screens fairly recently and is noticeably bucking the wider market malaise. The shares are relatively illiquid and my initial position is a bit larger than normal so unlikely to add much more from here.

Microsoft (3.3%): I started taking profits not too long after my last update and so far this seems like a sensible decision. While I have a lot of conviction in the long term quality of the business I was concerned that there may be a period of stagnation during which the shares underperform, given the relatively high rating, were growth to slow for the next few years. Reducing the size of my holding also gives me more scope to buy if the valuation gets too cheap. The price has now come down quite a bit leaving the valuation looking fairly cheap. I’m happy to hold.

Broadridge (3.1%): Broadridge predictably continues to make steady progress with some very good results in August. The share price had been performing well but started selling off not long after these results and is now back around the lows. This is pretty much in line with what has happened with the wider market so not necessarily a great cause for concern but was still a bit surprising. Perhaps it relates to this recent short report by Spruce Point capital. This doesn’t appear to have any smoking gun revelations but I am yet to fully digest the more detailed points made to see if they affect my long term conviction.

PepsiCo (3.1%): PepsiCo is a relatively new holding, bought to bring a bit more defensive stability to the portfolio. It just recently issued results which were very strong and showed it had been able to preserve margins in the face of rising costs remarkably well. I’m happy to continue to add to my position.

Canada Goose (3.0%): Canada Goose’s last results were ahead of expectations. However, the share price has been steadily falling over the past quarter much to my consternation. I think this is most likely just due to negative sentiment towards retail in general and perhaps partly fear about the impact of lockdowns in China (which is currently a major part of Canada Goose’s growth ambitions). This seems well overblown to me and the valuation seems far too cheap given the profitability and international growth potential. I’ve added to my position a little but am reluctant to go further until the price shows signs of rebounding.

Cerillion (2.9%): Cerillion has been performing very well and the share price has been consolidating not far from the highs. Similar to Calnex I decided to take some profits as, while the business should be pretty defensive, there is a significant risk of a downturn in activity simply because sales are lumpy. I’m not looking to add at the moment but happy to hold.

AB Dynamics (2.9%): this is a new purchase that I bought shortly after AB Dynamics reported that trading was ahead of expectations. AB Dynamics saw its business severely disrupted by the pandemic response as it relies on demand from automotive manufacturers, who in turn suffered major supply chain disruption and deferred capital purchases of AB Dynamics equipment. I think there should be quite a bit of scope for it to beat expectations as its business picks up again and I have conviction in the long term prospects. However, demand may be quite cyclical. I will wait to see how trading progresses before deciding my next move.

Moncler (2.9%): trading at Moncler still appears to be strong. Since it beat expectations in July, the CEO has been upbeat about trading and other luxury businesses such as LVMH have been beating expectations. The share price hasn’t really gone anywhere but I suppose you could say it has been relatively strong in the current context. There is some risk that trading deteriorates if there is a bad recession but for now Moncler seems pretty resilient. The valuation seems reasonable. I could be tempted to add to my position.

Diageo (2.7%): since I bought Diageo fairly recently it has updated that trading is going well at its AGM at the beginning of October. I’m very comfortable with the role Diageo plays in my portfolio as a more boring, defensive investment and would be happy to add to my position, especially if the price falls.

The rest of my portfolio is made up of Fonix Mobile, Celsius and Shopify. These are all small recent purchases where there is little to update on yet.