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Merill Funds 2022 Q4 Commentary
Merill SICAV - 15.01.2023

Merill SICAV plc

Q4 Funds Update – October to December 2022

Quarterly markets review:

Although markets have made advances over the previous three months, 2022 was still a terrible year for investors as both equities and government bonds posted negative returns. Investors are still concerned about high inflation, slowing GDP growth, and the possibility that an aggressive reaction by central banks would trigger a recession. Even though 2023 is predicted to see a drop in both corporate profitability and economic growth, those negative expectations have been at least partially priced into stocks and bonds at current levels. As a result, if the economy turns out to be more resilient than predicted, it might stimulate the asset market in early 2023. Asian stocks also rose as a result of China relaxing its zero-Covid policy.

For U.S. markets, inflation continues to be the key concern. Though it probably peaked in the third quarter of 2022, inflation will continue to be high due to supply-chain disruptions. It puts pressure on the Fed to put price stability ahead of economic growth, which dims the outlook for corporate profits and asset prices. Stocks began the month of December by giving up some of the gains made in October and November as investor optimism was once again dampened by fears of a recession and worries about rising interest rates. Consumer Discretionary was under pressure, although ten sectors recorded strong growth for the quarter.

In Europe, a challenging winter lies ahead. In December, the European Central Bank (ECB) increased interest rates by 50 basis points, which was a slower rate of increase than its earlier 75 bps increases. Consumer spending and industrial production will be affected negatively by high energy prices, and the ECB will likely continue to tighten monetary policy as a result of persistently high inflation. In October, headline inflation in the eurozone hit 10.6%; however, as the region's economy deteriorates, inflation could decline through 2023. Given that the Russia-Ukraine conflict is still not over and that indicators of industrial production are starting to fall as a result of high energy costs, it is impossible to imagine the region avoiding at least a mild recession. Eurozone shares notched up a strong advance in Q4, outperforming other regions. Gains came from a variety of sectors, notably economically-sensitive areas like energy, financials, industrials and consumer discretionary.

Government bond valuations have improved after the rise in yields. Longer-duration bonds outperformed those with shorter durations in Q4 as bond investors reacted to more-resilient-than-expected economic data. In the corporate bond market, both higher-yielding, lower-quality corporate bonds and investment grade bonds posted similarly positive returns for the fourth quarter, while lower-yielding and safer investment-grade corporate debt underperformed for the full year.
Merill Total Return Income Fund    
As at 30 December 2022, the Fund had €39.41 million in assets under management.  Both equities and bonds recovered during this quarter. Compared to the prior quarter, we decreased our cash balance and kept up with our plan to purchase short-term bonds with attractive yields. We also sold off some equity positions during the Q4 rally, realizing a healthy profit. The yields attained from recent bond purchases were greater than in prior quarters, which will raise the income stream in the future, furthermore, the credit quality of the existing portfolio has further improved.
Merill High Income Fund
As at 30 December 2022, the Fund had €58.11 million in assets under management.  Data on inflation are finally indicating a turning point, but they are still very high. With this setting, it is still anticipated that central banks would need to raise interest rates further in order to reach their inflation goals. So, in Q4, a short duration strategy was still necessary. Even if investment grade bonds have performed well, their yields continue to present an entry opportunity from a risk-reward perspective.
Merill Global Equity Income Fund
As at 30 December 2022, the Fund had €20.67 million in assets under management. Our cash balance, which is still higher than in prior years, has been carefully deployed into stocks we believe should be retained for the long term. Through the course of 2022, our defensive strategy gave us the chance to purchase a number of equity assets at a relatively discounted rate. The cash position was still relatively high at the conclusion of the quarter and will be used when company valuations improve further. 
Merill Strategic Balanced Fund
As at 30 December 2022, the Fund had $26.42 million in assets under management.  During this quarter, we continued to reinforce our exposure to senior debts by taking profit on our equity exposure.  The major goal was to lower the stock exposure to its minimum and grow the bond exposure to its maximum by year's end, with a view toward 2023 and the potential recession that could follow. The last quarter's acceleration arrived just in time for a last-minute tactical change. We kept taking a protective approach, limiting our exposure to stock risk and transferring it into US Treasury securities. Additionally, the credit rating profile as a whole has improved.

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This document is issued by Jesmond Mizzi Financial Advisors Limited (JMFA) as Managers of Merill SICAV plc and distributors of the Fund. JMFA (IS30176) of 67, Level 3, South Street, Valletta, VLT 1105 is licensed to conduct investment services business under the Investments Services Act by the MFSA of Triq l-Imdina, Zone 1, Central Business District, Birkirkara, Malta and is a member firm of the Malta Stock Exchange. Merill SICAV plc, the Fund manufacturer, is incorporated and licenced as an open ended collective investment scheme, registered in Malta, qualifying as a Maltese UCITS with effect from the 16th October 2015. This document does not intend to give investment advice and the contents therein should not be construed as such. The directors or related parties, including the company, and their clients are likely to have an interest in securities mentioned in this document. Past performance is no guide to future performance and the value of investments may fall as well as rise.


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