The month started off with the much-anticipated April nonfarm payroll employment figure in the US. While Bloomberg consensus expectations were for a lofty 1 million new jobs to be added, the outcome surprised many with a mere 266,000 jobs added – the largest miss on record. However, delving into the detail, labour market dynamics are much stronger than presented at face value. In fact, US job openings released on the 11 May came in at a record high of just over 8 million unfilled jobs, highlighting that unemployment benefits are keeping potential labour market participants on the side-lines. Anecdotal evidence in recent weeks suggests that employers are prepared to pay higher wages to incentivise the beneficiaries of unemployment benefits to return to the labour market. Interestingly, to address the mismatch between vacancies and the supply of labour, the Republican Party has opted to end unemployment assistance much earlier than the proposed date of 6 September to as early as June and July in several Republican-led states. This sets the tone for much stronger employment numbers in the coming months.
Reflation remained a key theme in markets as the Refinitiv/Core Commodity CRB Index climbed a further 3% in May after surging 8% in the previous month. In fact, several key inflation releases for the month of April surprised to the upside with the year-on-year consumer price index rising 4.2% vs 3.6% surveyed and registered as the largest 12-month increase since September 2008. Similarly, the producer price index surged 6.2% year-on-year compared to survey estimates of 5.8%. Lastly, the US Federal Reserve’s (the Fed) official targeted measure of inflation, the personal consumption expenditure price index, printed at a higher 3.6% year-on-year, marginally above survey estimates of 3.5%.
Higher price pressures have become a ubiquitous theme on a global level and whilst it can be argued that these annual price changes have been distorted due to base effects from lockdown restrictions in the prior year, the sequential change in inflation has been relatively robust due to better-than-anticipated demand, higher wages and supply chain bottlenecks.
Despite some big misses on the data front, global equity markets grinded higher during the month with the FTSE All World Index rising 1.65%, although slightly softer compared to the 4.4% increase in the previous month. Solid progress continues to be made on the vaccine rollout in key markets such as the US and the UK, with fully vaccinated rates of 41% and 38% of the population in each region respectively.
While the VIX “fear gauge” ended the month at a lower 16.8 compared to 18.6 the previous month, episodic volatility spikes were apparent mid-month. For now, cross asset volatility remains contained, although we suspect that the investment climate will be challenging going forward as economic data begins to peak in many economies around the world.
During the course of the month, we embarked on a de-risking exercise across the Global Multi-Asset Fund range and took profits on key positions geared toward the reflation trade. While we believe that there is further upside on some of these positions, the risk reward relationship has certainly diminished. In particular, the Chinese credit impulse has turned negative signalling that the second half of the year will almost certainly experience slowing growth momentum. Similarly, the global thrust from fiscal stimulus has been largely front-loaded resulting in a much more circumspect investing style relative to previous months. We acknowledge that the re-opening of many economies will provide investment opportunities and will certainly be looking to position for this accordingly.
We continue to believe that a more material recovery is expected this year as precautionary savings unwind, and as economic activity recovers off a low base. As the vaccine rollout continues, it’s a positive for the global economy and inflation is expected to continue rebounding in 2021. While talks of tapering by the Fed are expected to commence in the second half of the year, we believe that monetary policy will likely remain largely accommodative and that any reduction in liquidity from the central bank will be gradual.
In the short term, we continue to believe that yield curves in many developed economies will likely remain flat or gradually rise, diminishing the capital gain return in bonds as economic growth and inflation accelerate. However, many central banks will likely continue to intervene in the bond market and supress the pace of yield curve steepening in many of these developed economies.
The Global Growth Fund climbed 1.0% in April, above the benchmark of 0.8%, largely due to the equity overweight positioning, particularly in reflation-led sectors. The Global Balanced Fund climbed 0.4% and the Sterling Asset Management Fund rose 0.4%.
 All performance metrics are stated in I Class terms.
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