Summary

• Election jitters were in full effect in October as the CBOE Volatility Index (VIX) ended the month at 38 – notably higher than the 26.4 registered at the end of previous month.

• The bond market likely prepared itself for expansionary fiscal policy amid a steepening in the US bond yield curve, particularly in the long end. 

• A re-emergence of COVID-19 cases were evident in Europe without much success on any real vaccine to allay fears of renewed lockdown measures. 

• China GDP growth accelerated at a faster 4.9% year-on-year in third quarter compared to a rise of 3.2% in the previous quarter.

Market update

Election jitters were in full effect in October as the VIX ended the month at 38 – notably higher than the 26.4 registered at the end of previous month. Similarly, the S&P 500 Index started to trickle down from 12 October on the back of uncertainty surrounding the timing and magnitude of another US fiscal stimulus package. Nevertheless, the bond market was likely preparing itself for expansionary fiscal policy as a steepening in the US bond yield curve, particularly in the long end, became apparent during the course of the month.   

A spike in COVID-19 cases were evident in Europe without much success on any real vaccine to allay fears of renewed lockdown measures. This corresponds with the downturn in the Euro Stoxx Index from mid-month. On a more upbeat note, China GDP growth accelerated at a faster 4.9% year-on-year in third quarter compared to a rise of 3.2% in the previous quarter. This was led by a stark acceleration in construction activity +8.1% year on year, as well as an 18.1% surge in the Information Transmission, Software and Information Technology Services sector. Accordingly, strong high frequency data from emerging markets, in general, likely continued to fuel the gains posted in the MSCI Emerging Markets Index which climbed 2% in October. 

Price data remained reflationary, as output price charges from the JPMorgan Global Composite PMI accelerated at a faster 51.8 index points in September compared to a reading of 51.5 in the previous month. Energy, however, is one such commodity which hasn’t registered meaningful traction amid fears of oversupply from liquid fuels globally. In fact, the MSCI World Energy Index lost 5.8% in October. 

Fund strategy

Heading into the US election period, our overall asset allocation positioning has shifted to a relatively neutral stance given the various scenarios that can play out. We are wary over market pricing of a Democratic sweep and prefer to not take on unnecessary risks during this highly uncertain period. The possibility of a Republican win, a contested election and ambiguity surrounding the outcome of the Senate - a major influence on foreign policy - are all factors which we believe can influence the market. Given the historical invalidity of the election polls which sees Democratic candidate, Joe Biden, well ahead of the current US President, Donald Trump, we prefer to take a much more cautious approach to investing at this time.   

The uncertainty surrounding the quantum of another fiscal stimulus package in the US and how the funds will be utilised remains a contentious issue for the time being. Against this backdrop, we prefer to be vigilant and patient before allocating funds to potential beneficiaries of expansionary fiscal policy. 

While we remain constructive on emerging markets amid attractive valuations and potential high growth rates in corporate earnings, the outcome of the US election can certainly dampen these prospects, at least in the short-term. We maintain that the dollar will depreciate in the medium-term as risk appetite increases allowing for attractive entry points into emerging markets. However, at this stage, we prefer to stick to our investment philosophy of taking a more practical approach to investing which has delivered superior risk-adjusted returns across the various funds. Accordingly, we will be eagerly waiting to take advantage of opportunities in the market once more certainty prevails.  

Fund performance

Our Global Multi Asset Funds consolidated in line with expectations given the market pullback amid US election jitters with the Global Growth Fund falling by 1.5% [1] in October, albeit marginally better than the USD Global Growth Composite of a 1.7% decline. Similarly, the Global Balanced Fund lost 1.5%, the Sterling Asset Management fund pulled back 0.8% and the GBP Global Defensive Fund fell 0.9%.