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18 October 2023

The World is certainly not a happy place at present. The events that unfolded last weekend were truly awful. I had hoped that after the COVID pandemic, we were due a few years where ‘normal life’ might resume. Unfortunately, the evil of Putin and now Hamas, mean there is war in Europe and the Middle East.

Last Saturday began with a barrage of rocket fire from Gaza into Israel, hitting several cities including Tel Aviv, Rehovot, Gedera and Ashkelon and progressed with a truly barbaric invasion by land and air. The attack must have taken months to plan and to go under Israel’s radar is unheard of. They probably have the best intelligence service in the world. It makes the mind wonder! It is a possibility this has been orchestrated by Iran, in which case, Hezbollah in Lebanon could increase its aggression if Israel enters Gaza. This is perhaps why 300,000 Israeli troops, backed by tanks and helicopters, have yet to begin the ground invasion.

There is certainly a lot of political intervention with various heads of state visiting Israel. Political and diplomatic pressure, plus the pressure of the nation to bring the hostage’s home. A truly awful situation. Sadly, this very much plays into Putin’s hands. The shift of focus to the Middle East may possibly dilute the West’s assistance to Ukraine. Putin hailing his “deepening trust” between China, which he is visiting imminently is also cause for concern.

Since the attack from Hamas, we have seen the oil price begin to increase. This would not, in itself, be an inflation driver that could be cured by raising interest rates. Central banks have not tackled inflation well thus far, but increasing rates against this background would be futile and the political pressure not to do so would be intense.

The alternative scenario, in which Hezbollah holds off and allows Israel to wipe out Hamas, leaves the West with fewer worries and near current levels of interest rates are likely to prove sufficient as inflation remedies continue to work through their economies.

Equity markets are likely to remain nervy whilst also recognising the possibility of lower rates next year. This probably means those markets moving sideways for some while yet, most likely into 2024. The Santa rally may not arrive this Christmas.

QinetiQ (QQ)

With the general unrest, QinetiQ, the defence technology company targeting the UK, US and Australia should perform strongly. They have just reported H1 results with record order intake. Recent acquisitions and continued contract wins, lead me to believe H2 will be equally as impressive. Their focus areas fit in perfectly with AUKUS, meaning their addressable market is compelling. Avantus and Air Affairs along with the Cyber arm look to be key divisions going forward. QinetiQ are a FTSE 250 constituent and carry a Moderate risk rating, shares are currently 335p.

Eli Lilly (LLY)

Recommended in 9th May blog when they were $430. The share price has performed strongly since recommendation and achieved the target price of $600, far quicker than expected. We are still big admirers of Eli Lilly, their drug pipeline and management. With tirzepatide and donanemab still in the later stages with the FDA. Weighing in several factors, the decision was made to sell most of our holding.

Neil MorssChartered FCSI