The US Federal Reserve held their Monetary Policy Committee (MPC) meeting last month. As expected, the committee opted to increase their quantitative easing programme by raising their purchases of treasuries by US$80 billion per month and agency mortgage-backed securities by US$40 billion until significant headway is made in reducing unemployment and bringing inflation closer to the 2% target. Economic growth projections were upwardly revised throughout the forecast horizon to -2.4% in 2020 (-3.7% previously) and to a higher 4.2% (4%) and 3.2% (3%) in 2021 and 2022 respectively.
Equity markets continued to gain further traction in December as investors remained emboldened by vaccine news. In fact, the MSCI World Index climbed 4.3% over the month while the VIX “fear gauge” remained muted, closing at 22.8 in December from 20.6 in November. Energy continued on an upward trend as the reflation trade remains firmly intact with the MSCI World Energy Index climbing 3.8% in December after surging 28.2% in November. Similarly, the Reuters/Core Commodity CRB Index rose 4.8% after jumping 10.6% in November. In line with higher growth and inflation expectations, the US 10-year bond yield continued to climb even higher in December, ending the month at 0.91% from 0.84% in November.
We remain constructive on emerging markets amid potential high growth rates in corporate earnings and maintain our overweight position. We continue to believe that the dollar will depreciate as risk appetite increases allowing for attractive entry point into emerging markets. Relatively robust high frequency data and contained COVID-19 cases in Asia also bolster our investment thesis at this point. These factors are also a fundamental underpin to our overweight positioning in emerging market hard currency debt.
The rollout of a viable vaccine this year will certainly be a positive catalyst to the global economy, although this will likely take some time to be rolled out at scale. Nevertheless, we are emboldened by further progress on this front and the positive boost to equity markets that this will have. An accelerated shift to “risk-on” sentiment should also be beneficial to our current positioning. Overall, we are encouraged by the more upbeat outlook and believe that the easing of lockdown restrictions combined with the unwinding of precautionary household savings will catalyse equity markets heading into 2021.
The funds continue to be modestly underweight duration to avoid the adverse effect from curve steepening amid better growth prospects currently being priced into markets. Nevertheless, we believe that there will unlikely be a material steepening in the yield curve as the US Federal Reserve continues to intervene in the bond market.
 All performance metrics are stated in I Class terms.
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