Defying gravity best describes the behaviour of global equity markets over the past twelve months. Seemingly no amount of economic despair, political discord, policy disharmony, geopolitical disunity nor rational doubt was enough to dampen the animal spirits of unquestioning market exuberance. Confronted with enough economic evidence to chill the spine of even the most optimistic investor, positive equity market returns bore no reflection of underlying ubiquitous strife. "Gravitational" forces associated with higher interest rates pulled down disposable incomes, inflation rates, house prices and overall economic activity. The weight of increasing protectionism and escalating geopolitical tensions constrained global trade and investment. Consumer credit creaked under pressure from increasing financing costs. Government balance sheets, bloated over decades by the grotesque largesse of printed money, buckled under similar dynamics. Gravity also finally caught up with fiscal spending, cutting budgets as future funding costs became prohibitive. Confronted by such realism it might appear incredible for global equity markets to anticipate amelioration amongst such angst. Yet against any rational expectations that is exactly what happened. Towards the year end, markets hastily equated positive policy statements suggesting an end to monetary tightening with unquestioning acceptance of imminent interest rate reductions. Surging global bond and equity markets reflected this temporary shift in sentiment, but such simplistic causational logic implies "laws of inevitable consequences" that need not materialise in practice.

Global Review

With populist politicians throughout the Developed World scrambling to take credit for "the halving" of inflation during the period, it seemed extraordinary that dissenting voices did not assert the blatantly obvious. Politicians took no blame for causing the re-emergence of inflation since 2021, so how could they claim credence for containing it! Such crass contentions featured prominently in political rhetoric, as did contradictory communications from policymakers. Central Banks preached tough inflation-fighting credentials with commitment to interest rate rises, but not one admitted responsibility for causing inflation in the first place. Printing money before and during the Covid pandemic unequivocally fuelled the resurgence of inflation. As the world witnessed money in circulation turn negative for only the second time in forty years, inflation seemed to be miraculously tamed! Yet again, deception and deceit dominated public debate with the inevitable erosion of trust.

Events evolving in the United States over the past twelve months emphasised the familiar ongoing polarisation between reality and delusion. Whilst Main Street muddled through the malaise associated with contracting purchasing power and deteriorating living standards, Wall Street fantasised over history repeating itself: in essence, a year of division between fundamentals and froth. The former confronted numerous hurdles instantly recognisable as direct consequences of the rising interest rate environment. Declining property prices and potentially rising credit delinquencies cast a dark shadow over consumer confidence. More ominously, irresponsible balance sheet management by commercial banks exposed just how fragile financial stability invariably can be to sharply rising bond yields. Depositor panic ensued. The spectacle of queues outside branches returned, emphasising the vulnerability of the US banking system following years of gratuitous excess. Quickly brushed under the carpet, the US Central Bank deployed its classic Pavlovian responses: more money printing and aggressive arm twisting to "ensure" rescue bids were forthcoming. Stability was grudgingly restored, but not before three of the five largest bank failures in history had occurred. Most worrisome of all, financial markets barely batted an eye. Drowning in debt and stagnating without stimulus, the US economy constantly buckled during the period. Seemingly what mattered most to investors was that it did not quite break - at least not yet! Superficially freed from facing fundamental facts, financial markets frothed with anticipation of better times ahead. Sharply declining bond yields from October 2023 onwards were interpreted by equity markets that nirvana lay ahead. By the year end surging US stock prices had priced in numerous imminent interest rate cuts, no economic recession, double-digit profit growth for 2024 and inflation dead and buried! In the absence of such perfection materialising, suffice to say great scope exists for disappointment in the outlook for US financial assets over the medium term.

For European financial markets, similar dynamics between current fundamentals and future expectations dragged investor sentiment across polar extremes of the mood spectrum. Growth-wise, most European economies certainly provided little to cheer about. Germany just managed to dodge outright recession, France stagnated at virtually zero GDP growth all year, and Italy endured decelerating economic momentum throughout. On the periphery, Spain managed a modicum of growth, but the Celtic Tiger of Ireland suffered spectacular contractions in activity following many years of being Europe's poster child. Yet despite such depressing domestic economic fundamentals, investment opportunities initiated since the darkest days of Covid continued to perform well. High quality industrial companies, leading global energy providers and conservatively managed financials feature prominently amongst Europe's corporate titans. Unburdened by unrealistic expectations, often overlooked by prejudiced perceptions, such European exposures contributed significantly (again) to overall performance and total return. Conversely, numerous structural and cyclical frailties continued to erode investors' confidence in the UK. Popular acclamations that "the market was cheap" and "the market's attractive defensive nature and dividend paying culture" fell on deaf ears. Yet again UK equities failed to match the performance and growth opportunities found elsewhere in the world. Outwith the confines of the City of London this should come as no surprise. Losing its status as a centre for raising capital, be it by constant political instability in Westminster, the Brexit debacle, pension fund diversification, increased red tape or whatever, the relentless malaise continues. Regardless of whatever the prime factors of disillusionment are, the hard facts depict a beleaguered, shrinking market plagued with constant outflows now reduced to a total market capitalisation less than US technology giant, Apple (which also continues to defy gravity as its market cap reaches £2.3 trillion!). Twenty years ago 40% of the portfolio assets were in UK equities: by the end of 2023 this figure was just 4%. Given current UK investment opportunities for global growth and income objectives remain constantly surpassed by what is available elsewhere, this current position is unlikely to change any time soon.

Conversely, prospects brightened for numerous developing nations throughout the Developing World. Economic orthodoxy, firmly established by proactive policy initiatives in response to Covid related dislocations, began to bear fruit. Given the superior quality of Government and household balance sheets, Central Banks and policymakers across Asia and Latin America remained credible entities comfortably in control of current circumstances. As pricing pressures abated, relief from belt-tightening began. Both Brazil and Chile cut interest rates during 2023. Korea, Indonesia, India and Mexico witnessed inflation rates falling back to below targeted levels, suggesting evolving fundamentals firmly supportive of imminent rate cuts in these nations too. As always, individual market performance varied significantly across the Developing World over the twelve months. For the tenth time in twenty years, Latin America delivered the strongest performance of any global region! Constantly underappreciated by the wider global investor audience blinkered by aversion, apathy and animosity, such ill-informed scepticism remains baffling. From a self-interested portfolio perspective, long may this continue, with superior growth and dividend opportunities, not to mention diversification benefits, positively contributing to delivering the investment mandate. Elsewhere, whilst fundamentals in Asia also improved, the one noticeable exception was China. Suffering from fragile confidence and negative property prices, Asia's largest economy struggled to shrug off its post Covid hangover. With inflation periodically flirting with negative rates (deflation) concerns were expressed that Chinese fundamentals were turning "Japanese". Whilst Japanese history shows just how destructive a deflationary mindset can impact a consumer economy, it is premature to resign China to such a fate just yet. The Government's measures to stimulate policies to positively impact Chinese growth, are gaining momentum, but the world will watch future developments with more than a modicum of trepidation.

Performance

The NAV total return for the year to 31 December 2023 with net dividends reinvested was +8.6%. This compared with the Reference Index (FTSE All World) total return of 15.7%. The top five and bottom five stock contributors are detailed below:

* % relates to the percentage contribution to return relative to the Reference Index (FTSE All World TR Index)

Over the full financial year, the 8.6% NAV total return was welcomed, marking a return to real growth given the moderating UK Retail Prices inflation rate of 5.2%. Whereas overall global equity index strength tended to be extremely concentrated in just a handful of large US technology stocks, the portfolio's positive performance in total return terms was spread across numerous regions, sectors and businesses. For the second consecutive year, Latin America delivered by far the strongest regional index returns. This was partially reflected in portfolio returns with a +16% contribution to overall total return from the region. Whilst mining exposures to iron ore and lithium in Brazil and Chile struggled to make much progress in a world of falling commodity prices, consumer focused businesses such as Grupo Asur, Kimberly Clark de Mexico, Walmex and Banco Bradesco all performed strongly. The strongest regional portfolio performance was recorded from Europe with a +22% total return from the diversified asset exposure. A combination of strong earnings and dividend growth relative to muted expectations provided the impetus for above average returns from Swedish industrials Epiroc and Atlas Copco, German conglomerate Siemens, Italian electric utility Enel and BE Semiconductor in the Netherlands. In what proved to be a particularly profitable period for European exposures, only Swiss pharmaceutical company Roche lost any noticeable value.

Less impressive, yet still positive, total returns were also delivered by North American and Asian exposures. The majority of holdings in the United States contributed positively to total returns, with the portfolio's largest holding, technology giant Broadcom, being the standout performer. Unfortunately negative absolute performance from Canadian holdings constrained overall regional performance. Severely constrained by negative sentiment towards China (where existing portfolio holdings suffered yet another turbulent year), exposures to Asia ex Japan experienced the brunt of negative sentiment despite relatively robust fundamentals. A total return of just +3% was heavily skewed towards income contributions from holdings in Singapore, Thailand and Australia with only Samsung Electronics in South Korea and GlobalWafers in Taiwan contributing any meaningful capital performance. Whilst the UK equity market delivered a positive return over the twelve month period, the three UK portfolio holdings confronted tough operating conditions which proved punitive to overall performance and contributions. Lastly the residual Emerging Market Bond exposures witnessed the full brunt of Sterling's strength but still managed a positive +3% return for the year as bond markets rallied towards the year end. With a current running yield of 8.2% and many holdings still priced below par, it is expected that current exposures will be maintained.

Predicting dividend income over the financial year proved relatively straightforward notwithstanding the usual difficulties associated with accurately estimating dividends from cyclical businesses involved in energy, commodities and technology. Whilst positive cash flows on which dividends depend are arithmetically uncomplicated to identify, the "willingness to pay" remains very much in the hands of the pursekeeper. Thankfully the majority of holdings did not disappoint. Dividend increases from portfolio holdings generally matched conservative estimates, with 80% falling into this category. Over the period the net effect from positive surprises (Oversea-Chinese Bank Corp, Grupo Asur, Tryg Insurance) versus negative surprises (BE Semiconductor, Sociedad Quimica Y Minera) was negligible. Overall gross income accrued marginally increased year-on-year, with earnings per share growth of +1.7% reflecting fewer shares outstanding than the previous period.

Portfolio Activity

Portfolio turnover of 7% of gross assets over the period continued its recent decline to more normal levels. In a year when extended price distortions seldom prevailed, the lack of volatility in global markets limited new investment opportunities. Choosing to repay a £60m fixed rate loan that matured on 31 May 2023 reduced the overall level of outstanding loans to £140 million. Borrowing rates above 6% were deemed too expensive for five year equity gearing and hence not in our shareholders' best interests. This translated into gross asset exposure as a percentage of total exposure declining to 108% from 111%. Consequently overall equity gearing declined from 103% to 101% over the period.

European exposure witnessed a reduction in investment at the transaction level with profit taking in Swedish industrials Epiroc and Atlas Copco plus the outright sale of Swedish bank Nordea only partially offset by the new purchase of the French global drinks manufacturer Pernod Ricard. It is worth noting, however, that total gross asset exposure to Europe actually increased over the period due to strong European stock performance. In the UK, the proceeds from the outright sale of Vodafone were reinvested very gradually in a new position in Diageo, another leading global drinks distributor but with a distinctly different product portfolio and market focus than its French counterpart. Overall UK exposure declined to its lowest level in over four decades based on adjudged better growth and income opportunities elsewhere in the world. Finally within Developed Markets, portfolio activity in the North American region was extremely muted. Close to 1% of gross assets was raised from top-slicing Broadcom as exceptionally strong stock performance kept pushing the portfolio's largest holding above the 5% maximum investment guideline for any one position. Periodic weakness in global pharmaceuticals provided the opportunity to reinvest some of this cash into building up the existing position in leading global pharmaceutical company, Merck. Portfolio activity in Developing Markets reflected changes in relative valuations and stock preferences. Overall Asian exposure declined slightly, featuring outright sales of Taiwan Mobile and Lotus Retail in Thailand coupled with the exit of MTN Corp in South Africa. All three divestments were prompted by rising concerns over the sustainability of future dividend growth. One new holding was established in Asia with the purchase of Hong Kong Exchanges, one of the world's leading securities trading companies. As regards Latin America, proceeds raised from profit taking in Grupo Asur in Mexico, to keep the holding size below 5%, and the outright sale of Kimberly Clark de Mexico, a long-term holding deemed to be more than fully valued, were reinvested in a new position in Walmex, a leading multi merchandise retailer in Mexico 70% owned by US Walmart. Finally, exposure to Emerging Market Bonds was marginally reduced with the outright sales of Ecuadorian Government Bonds due to a restructuring tender of the country's debt.

From an overall investment perspective, the emphasis continues to favour diversified asset exposures in companies deemed to be beneficiaries of the evolving backdrop, maintaining a "barbell" strategy of owning both growth and cyclical stocks. Selective growth companies, where yields tend to be lower, should continue to benefit from accelerating trends in industrial automation, semiconductor miniaturisation and digital communications. The greatest potential for positive cyclical momentum upside surprises can still be identified in Asia and other countries where substantial infrastructure spending and pent up consumer demand exist. Corporate earnings may be under recessionary threat in many parts of the world, but upwards earnings and dividend revisions in Latin America and Asia will likely emerge as domestic interest rates decline. In such regions, sectors and businesses the portfolio remains meaningfully invested.

Summary of Investment Changes During the Year

Outlook

Throughout 2023 the compulsion to hang firmly onto the belief in a return to the 2% 'inflationary mean' of the past decade remained all consuming. Such a delusion was not confined to just financial markets and investors either. Central Bankers in the Developed World remained evangelical in their unwavering commitment towards 'returning to the 2% trend'. Perhaps even more incredulously, the widespread belief persisted that this would be engineered without causing economic recessions, without raising unemployment, without deteriorating asset quality and without financial dislocations despite the previous decade of misappropriate capital allocation. The harsh reality is an evolving economic and financial backdrop in which a 2% target remains totally unrealistic short of orchestrating enormous economic pain and suffering. Political practicalities of general elections across the globe in 2024 are unlikely to entertain even the thought!

Meanwhile the sheer magnitude of leverage in the Developed World's Government sector drives over-extended balance sheets towards breaking point, leaving Central Banks paralysed due to dwindling policy options. Such enormous leverage exposes maturing bonds to be priced by markets, where real rates of return are essential. Any compromise or attempted fudge on inflation targeting is likely to send yields spiking higher regardless of movements in short rates. Despite the market euphoria of late 2023, the transition from printing money to prudent money remains the single most important, and necessary, change to monetary conditions going forward. The money supply contractions currently being witnessed in major global economies suggest the process is already under way. Such practice has broad implications for long-term equity multiples (lower), prevailing bond yields (higher) and optimal stock selection. It is reasonable to assume equity valuations adjust to reflect real tangible value ascribed to profitability, cash flows and dividends. The implications might be lower overall returns from financial assets for the next decade simply because risk-based assets would need to compete with the not-yet-recognised costs of the stunning rise in government debt. The practicalities of securing positive real returns in such an environment could prove demanding, but through focusing on quality, real assets and broad global and sector diversification the Company maintains the flexibility to achieve its investment objectives.

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Investment objective

The aim of the Company is to achieve an above average dividend yield, with long term growth in dividends and capital ahead of inflation, by investing principally in global equities.

Cumulative performance (%)

Discrete performance (%)

Source: abrdn Investments Limited, Lipper and Morningstar. Past performance is not a guide to future results.

Important information:

Risk factors you should consider prior to investing:

• The value of investments, and the income from them, can go down as well as up and investors may get back less than the amount invested.
• Past performance is not a guide to future results.
• Investment in the Company may not be appropriate for investors who plan to withdraw their money within 5 years.
• The Company may borrow to finance further investment (gearing). The use of gearing is likely to lead to volatility in the Net Asset Value (NAV) meaning that any movement in the value of the company’s assets will result in a magnified movement in the NAV.
• The Company may accumulate investment positions which represent more than normal trading volumes which may make it difficult to realise investments and may lead to volatility in the market price of the Company’s shares.
• The Company may charge expenses to capital which may erode the capital value of the investment.
• Movements in exchange rates will impact on both the level of income received and the capital value of your investment.
• There is no guarantee that the market price of the Company’s shares will fully reflect their underlying Net Asset Value.
• As with all stock exchange investments the value of the Company’s shares purchased will immediately fall by the difference between the buying and selling prices, the bid-offer spread. If trading volumes fall, the bid-offer spread can widen.
• With funds investing in bonds there is a risk that interest rate fluctuations could affect the capital value of investments. Where long term interest rates rise, the capital value of shares is likely to fall, and vice versa. In addition to the interest rate risk, bond investments are also exposed to credit risk reflecting the ability of the borrower (i.e. bond issuer) to meet its obligations (i.e. pay the interest on a bond and return the capital on the redemption date). The risk of this happening is usually higher with bonds classified as ‘sub investment grade’. These may produce a higher level of income but at a higher risk than investments in ‘investment grade’ bonds. In turn, this may have an adverse impact on funds that invest in such bonds.
• Yields are estimated figures and may fluctuate, there are no guarantees that future dividends will match or exceed historic dividends and certain investors may be subject to further tax on dividends.
• The Company invests in emerging markets which tend to be more volatile than mature markets and the value of your investment could move sharply up or down.

Other important information:

Issued by abrdn Investments Limited, registered in Scotland (No. 108419), 10 Queen’s Terrace, Aberdeen AB10 1XL. Authorised and regulated by the Financial Conduct Authority in the UK.