14 November 2022 View all posts

Multi asset funds: October 2022

Summary

  • The UK once again dominated headlines over the month with the resignation of the Chancellor of the Exchequer, Kwasi Kwarteng, as well as the Prime Minister, Liz Truss.

  • While US headline inflation continued on a mild disinflation trajectory, core inflation (excluding volatile food and energy prices) accelerated to 6.6% year-on-year September – the highest increase since 1982.

  • Japan’s economy minister, Daishiro Yamagiwa, resigned amid concerns over his links to a church group.

  • Xi Jinping obtained a third five-year term as head of the Communist Party. Despite China’s third quarter GDP print accelerating 3.9% quarter-on-quarter - ahead of Bloomberg’s consensus expectations of 2.8% - the unwavering approach to stringent lockdowns continues to drive equity market directionality as investors’ discount lacklustre earnings prospects.

Market update  

The UK once again dominated headlines over the month with the resignation of the Chancellor of the Exchequer, Kwasi Kwarteng, as well as the Prime Minister, Liz Truss. This makes Liz Truss the shortest serving PM in history lasting just 44 days in office. The appointment of Jeremy Hunt as the Chancellor and Rishi Sunak as the new PM calmed markets’ nerves amid a notable decline in CDS (Credit Default Swap) spreads subsequent to their respective appointments. This can likely be ascribed to improved perceptions of fiscal prudence.

Markets remain extremely volatile. Most notably, global equities displayed a countertrend move rebounding sharply over the month, although the fundamentals continue to point toward a slowing global economy with deteriorating liquidity conditions. The unprecedented pace in which global bond yields and mortgage rates have risen in recent months is somewhat perturbing, as mortgage application rates have already seen a sharp decline. Similarly, developed market housing price appreciation is beginning to slow. While this will certainly be a positive for lowering the global inflation trajectory heading into 2023, central banks will need to strike a fine balance between overtightening into a fragile global economy and quelling price pressures due to the lagged impact of monetary policy on consumer and business spending patterns.    

While US headline inflation continued on a mild disinflation trajectory, core inflation (excluding volatile food and energy prices) accelerated to 6.6% year-on-year September – the highest increase since 1982. This will almost certainly embolden the Fed to continue the most aggressive monetary policy tightening path in history, as this is considered to be the preferred measure of inflation over which the Federal Open Market Committee have the greatest degree of influence. We will also be monitoring the degree to which the recent 2 million barrel per day cut in oil supply from OPEC (Organization of the Petroleum Exporting Countries) will influence oil prices going forward. The drawdown in the strategic oil reserve in the US has provided little respite to prices, but we expect oil price volatility to remain high as evidenced by the CBOE Crude Oil Volatility Index.   

While the Dollar weakened somewhat in October, on a longer-term basis the greenback has gained support from the Fed’s quantitative tightening programme, a slowdown in the global economy and rising US bond yields. We suspect the latter has been exacerbated by the selling down in US Treasury holdings by Japan and China into a highly illiquid market. While financial conditions have already tightened meaningfully, we expect more to come which will likely increase intraday volatility in bonds, currencies and equities.  

In East Asia, not only did Japan’s economy minister, Daishiro Yamagiwa, resign amid concerns over his links to a church group, but Xi Jinping in China obtained a third five-year term as head of the Communist Party. Despite China’s third quarter GDP print accelerating 3.9% quarter-on-quarter - ahead of Bloomberg’s consensus expectations of 2.8% - the unwavering approach to stringent lockdowns continues to drive equity market directionality as investors discount lacklustre earnings prospects. We remain cautious on the Chinese economy, although valuations are looking cheap, and we expect opportunities to emerge in the coming months.

Fund strategy

Our primary concern going forward is whether the resilience of company earnings can be extrapolated into the future. We believe that this may prove difficult as fiscal and monetary policy, particularly in the US, will likely be on a restrictive path. In particular, the lagged effect of tightening monetary policy actions will likely begin to filter through to changes in consumer behavioural patterns. Higher borrowing costs for both businesses and consumers will likely supress economic activity, particularly in discretionary related areas, as economic agents look to rein in expenditure to tighten their balance sheets and income statements. Households are utilising various credit instruments, particularly credit card debt which is currently at all-time highs to prop up short term expenditure prospects. Accordingly, we believe lowering the equity beta in the Ashburton Global Multi-Asset Fund range has been the appropriate response to the current operating environment as we head into the new year, particularly because we are of the view that economic growth and company earnings expectations are currently too optimistic. We prefer sectors with less earnings cyclicality and have a strong Dollar bias. On the fixed income side, we maintain our underweight duration position amid tightening monetary policy dynamics due to elevated inflation levels. 

Fund performance

The USD Global Growth and Balanced Fund rebounded 2.6% and 1.6% respectively compared to the Morningstar peer groups which climbed 2.7% and 2% for each respective fund. While the funds continue to have a defensive tilt, negative spill over effects from Hurricane Ian detracted from our Utilities positioning, clouding the outlook on the sector. Nevertheless, both funds remain in the first quartile year-to-date and over a one-year period. Our most defensive fund with the highest fixed income structure, the Sterling Asset Management Fund, rebounded 0.6% and we took the opportunity to raise more cash across the multi-asset fund range. Overall, 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.