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Multi Asset funds - May 2018

US treasuries and dollar surge while rising oil price helps EM.


  • US treasuries shook market sentiment as US 10 year yields broke through 3% reaching the highest levels in seven years. Questions remain as to whether we have reached a tipping point in bond yields, as further increases will most likely lead to an extension of a risk-off phase.
  • The bond yield move also began a turnaround in emerging market (EM) flows, with inflows of the past number of months turning into outflows. However, the counterbalance is the higher oil price, which is a distinct positive to oil-producing EMs.
  • Despite the negative bond market move, developed market equities were slightly up, with the S&P 500 index up 0.3% month and MSCI All Countries index up 0.6%.
  • With the markets generally being short to the US dollar, the abrupt shift higher in bond yields led to a shift in relative strength for the dollar. The DXY index, being a weighted average of the dollar’s value against major world currencies strengthened by 2.1% in the month – the most significant positive move since late 2016.
  • We had previously increased our equity weightings on the back of market weakness, but with leading economic indicators beginning to roll over we opted to take some risk off the table, but still retaining a small overweight position in equities.

Market update

Two intertwined market dynamics were at play during April, namely the strong US dollar and weak US treasuries. The US Federal Reserve continues on its path of monetary policy normalisation, and after the last hike in March, it appears to be on track for another rise in June. 

With that in mind and given the current inflation dynamics, long-dated US bond yields rose with 10 year yields topping out above 3%, the highest levels seen in seven years.  This is an important psychological level and expectations are building that a break higher may be on the cards. With such a backdrop, it is natural that the US dollar was the beneficiary of such moves, strengthening roughly 2% against the other major G10 currencies.

Added to this, geopolitical concerns in the Middle East have again reared their head causing oil prices to shift another 6% higher in the month. West Texas Intermediate spot prices are now up over 13% since the beginning of the year. With tight labour markets in the US coupled to this, it becomes apparent that inflation concerns remain a major worry for markets going forward.  Indeed, US 5 year inflation breakeven rates are at their highest levels in four years.

With that backdrop, equity markets drifted sideways to slightly up, with the S&P 500 up 0.3% on the month and MSCI All Countries Index up 0.6% in US dollar terms. As the US dollar strengthened, emerging market (EM) spreads widened, with the JP Morgan EMBI spread rising to levels last seen in early 2017. This is an important indicator of possible future stress in the EM – growth paradigm, and will be a space to watch during the year.

Fund strategy

While we have been cautiously optimistic about equity prospects, we are cognisant of the fact that some key economic indicators have started topping out. While valuations are now better than they were, it means that we will not be overweighting equity exposures in a significant manner until we have more certainty around the macroeconomic trajectory. 

On the fixed income side, we remain underweight as well as being underweight on a duration basis (still preferring EM yields against developed markets), as we believe inflationary pressures are certainly rising, and the possibility of oil prices spiking upwards on geopolitical issues is a major concern.

We have exited minor holdings in EM fixed income, preferring a more focussed approach giving us greater liquidity and the ability to shift more quickly should it be required. In line with our transition towards a more active approach to managing exposures, our position in Fidelity International funds, where appropriate, is across three funds, namely the EM Local Currency Debt Fund, the Global Property Fund and the equity-based Emerging Markets Fund.

On a relative valuation basis, we are also still strategically biased towards energy, India and China to which we have equity exposure via Ashburton specialist funds.