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Multi Asset Funds: July 2022

Summary

• Global equity markets continued on their volatile campaign with the FTSE All-World Total Return USD Index falling 8.4% over the month, as economic data releases remained lacklustre.

• The US Federal Reserve delivered a 75bps hike over the month amid the highest inflation print since December 1981 (+8.6% year-on-year in May).

• Overall, global economic data continues to slow with confidence metrics trundling at depressed levels – particularly in developed markets. One bright spot, however, is the re-opening of the Chinese economy leading to upside surprises in recent economic data releases.

• According to Our World in Data, 61% of the world’s population was fully vaccinated as of 30 June 2022, compared to 60% in the previous month.    
 
Market update

Global equity markets continued on their volatile campaign with the FTSE All-World Total Return USD Index falling 8.4% over the month as economic data releases remained lacklustre. This brings the year-to-date drawdown to 19.7%. Similarly, the FTSE World Broad Investment-Grade Bond Index declined 3.1% in June (-14.3% year-to-date), amid a higher-than-anticipated US CPI print and a slightly more hawkish Eurozone Central Bank. The investing environment remains highly uncertain as evidenced by the historically elevated VIX and MOVE Index levels (US equity and bond market volatility indexes respectively). It is worth noting that inflation expectations, as proxied by the US 10-year breakeven inflation rate, are lower on a year-to-date basis as a deteriorating growth outlook suggests that demand-pull inflation will likely abate. Moreover, the Bloomberg Commodity Index fell 10.8% over the month, providing some respite for a more sustainable inflation trajectory.   

The US Federal Reserve delivered a 75bps hike over the month amid the highest inflation print since December 1981 (+8.6% year-on-year in May). As at the end of June, federal funds futures markets have priced a further 179bps worth of hikes before year-end as taming inflationary pressures remains at the epicentre of the central bank’s mandate. In fact, the FOMC increased their PCE inflation projections this year to 5.2% (4.3% previously), GDP growth forecasts were lowered to just 1.7% (previously 2.8%) while signalling a swifter hiking cycle as displayed in their dot plot projections. While the ECB and BoE also intend to tighten monetary policy further, the BoJ remains on a divergent path reaffirming their commitment to accommodative monetary policy. This has resulted in enormous pressure on the Japanese Yen and the BoJ’s yield curve control programme.   

Overall, global economic data continues to slow with confidence metrics trundling at depressed levels – particularly in developed markets. One bright spot, however, is the re-opening of the Chinese economy leading to upside surprises in recent economic data releases. While we are cautious of sudden lockdowns being erected again, low relative valuations compared to other equity regions are making the investment case attractive. Moreover, supportive liquidity dynamics, a notable turnaround in the credit impulse and well-contained levels of inflation underpin a more upbeat macroeconomic backdrop.           

Encouragingly, Covid-19 cases remain well contained on a global level. According to Our World in Data, 61% of the world’s population was fully vaccinated as of 30 June 2022, compared to 60% in the previous month.    
 

Fund strategy

We remain cautious about the returns for global equity markets, as supportive monetary and fiscal policy that helped propel equities last year continues to fade. Developed market consumption expenditure is expected to be more muted amid lower savings rates, subsiding government transfer payments, and as real disposable income is eroded by inflationary pressures. Accordingly, we continue to lower the overall fund beta to be less exposed to market risk. However, we have recently added more country exposures to China and Hong Kong regions in the multi-asset funds, amid attractive valuations and supportive liquidity dynamics. There has been a notable turnaround in the credit impulse and well-contained levels of inflation are underpinning a more upbeat macroeconomic backdrop. While global inflation will likely remain elevated, we continue to believe that price pressures will dissipate in 2H22, as we assume supply chain bottlenecks will likely unwind as trading conditions normalise. Increasing headwinds for consumer demand will also likely add to disinflationary pressures, as high staple prices such as food and energy erode real consumption expenditure prospects. Moreover, favourable base effects will likely assist in lowering year-on-year CPI prints.   

Fund performance


The USD Global Growth and Balanced Funds fell 5.1% and 3.6% respectively, although better than their Morningstar peer groups which fell by 6.3% and 5.3% for each respective fund. Both Funds remain in the first quartile relative to their Morningstar peer groups year-to-date and on a one-year basis. A stronger dollar, a geographical tilt toward China and Hong Kong, as well as our relatively high cash positioning were likely among the primary reasons for the relative outperformance over the month. Our most defensive Fund, the Sterling Asset Management Fund contracted 3.8%. We continue to remain vigilant by keeping the overall fund beta at lower levels compared to the majority of last year amid a highly volatile and uncertain economic environment.  

 


 

   



[1] All performance metrics are stated in I Class terms.