Global central bank policy rate decisions were in focus over the month as the world continues to become accustomed to a rise in the global cost of capital.
In line with market expectations, the Eurozone Central Bank raised interest rates by 50 basis points (bps) to 2.5%. However, the current president of the ECB, Christine Lagarde, was decidedly hawkish amid an upwardly revised inflation forecast despite a subdued growth outlook. This resulted in a meaningful widening in the Italian – German bond spread - a closely watched metric for sovereign default risk in Italy. Similarly, the Federal Open Market Committee (FOMC) raised the federal funds rate by 50 bps to a range of 4.25% - 4.5%. However, there were several important updates to the Fed’s economic projections that are worth noting heading into 2023. Growth forecasts were downwardly revised to just 0.5% (1.2% previously), while Personal Consumption Expenditure (PCE) inflation was upwardly revised to 3.1% (2.8% previously). The stickiness of inflation remains evident in the mind of the FOMC members as evidenced by the 3.5% projection on core PCE in 2023 from 3.1% previously forecast. Resultantly, the median federal funds rate forecast was lifted to 5.1% in 2023 from 4.6% previously estimated which is at odds with futures market pricing in several interest rate cuts in 2023. This is certainly inconsistent with the Fed’s messaging of the federal funds rate staying higher for longer.
While the latest CPI print in the US surprised to the downside, the Fed clearly remains uncomfortable with the level of inflation. Moreover, the loosening of financial conditions more recently predominately due to the running down of the Treasury General Account in our view will likely keep the Fed on a restrictive path in 2023 as tightening financial conditions will be needed to bring inflation down to more sustainable levels. In addition, the passing of a $1.66 trillion government funding bill by the House of Representatives may well cloud the inflation outlook.
Despite high frequency data in China surprising to the downside over the month, investors continued to pin their hopes on a movement away from Covid-zero policy to a full re-opening of the economy in 2023. It is encouraging to see Covid-19 cases well off their peak, a continued uptick in the credit impulse and easing of monetary policy have taken place more recently. While we remain cautious of further haphazard policy pronouncements, we expect the outlook for China to improve and will be looking for more tangible evidence of a sustainable re-opening of the economy heading in 2023.
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 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. Accordingly, we prefer sectors with less earnings cyclicality. On the fixed income side, once peak hawkishness of the Fed has been sufficiently priced in by market participants, and inflation is firmly on a downward trajectory, we will be looking to take a more explicit position on the long end of the curve. This will be to reflect a deterioration in growth dynamics that will begin to overshadow inflation fears.
The USD Global Growth Fund fell 2.2% compared to the Morningstar peer group of a 1.8% downturn, although still registered second quartile performance in 2022 and over a two-year basis. Overall, the fund remains defensively positioned with a tilt to lower beta sectors and likely has a higher fixed income weighting relative to competitors. The USD Global Balanced fund fell 2.4% compared to the Morningstar peer group of a 1.3% decline. Similarly, the fund registered second quartile performance in 2022 in the Morningstar peer group category. Our most defensive fund with the highest fixed income structure, the Sterling Asset Management Fund, fell 2.1%. As we head into 2023, we endeavour on our best efforts to preserve the invested capital of our investors amid a highly volatile and uncertain economic environment.
 Performance stated in the I share class
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