Global markets rallied in January with the FTSE All-World Total Return USD Index surging 7.1% while the FTSE World Broad Investment-Grade Bond Index climbed 3.4%.
China continued to register a sharp recovery as they make notable strides in moving to a post-Covid world. GDP, retail sales and industrial production all surprised to the upside providing promising evidence that the world’s second largest economy is seemingly finding a floor with regards to economic activity. In fact, high frequency mobility data such as passenger volumes by railway in Beijing has shown a stark improvement, providing hope that future economic data will be robust. These factors combined with Covid-19 cases well off their peak, low inflation and accommodative monetary policy provide a solid foundation toward an economic recovery. While we remain cautious of further haphazard policy pronouncements, at this juncture, 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 into 2023.
We believe the upturn in global equity markets and weaker dollar over the month can largely be attributed to loosening financial conditions with several federal funds rate cuts being priced in the futures curve commencing by mid-year. However, we remain cautious of this outcome given that it is inconsistent with the Fed’s messaging of the federal funds rate staying higher for longer and the explicit concern in the latest FOMC minutes over loosening financial conditions. We remain of the belief that financial conditions will need to be restrictive this year and that tightness in the labour market will likely prevent the Fed from easing monetary policy too soon as quelling economic demand will likely be needed to bring inflation back to more sustainable levels. Moreover, concerns over the US debt ceiling and the need to replenish the treasury general cash account will likely also lead to a withdrawal of liquidity in the coming year. It is also worth noting that the change in private inventories was the primary driver in the better-than-anticipated 4Q22 GDP print.
Other noteworthy events that occurred during the month include the rebound of the European stock market buoyed by lower natural gas prices, China re-opening and lower headline inflation. While this is certainly welcomed, core inflation has printed at the highest level on record which will likely keep monetary policy restrictive, to supress the stickiness in the inflation trajectory going forward. Record bond buying by the Bank of Japan to suppress bond yields amid divergent global central bank policies also remains another close watchpoint. This is largely due to the diminished ability of the sovereign to service interest payments with government debt to GDP ratios well above 200%.
Going forward, we continue to believe that 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. The deepening inversion across the US government bond curve keeps us cautious on the global economy as we head into 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. We believe that the China re-opening and its regional beneficiaries warrant further capital allocation barring any further haphazard policy pronouncements with relative underweights from developed markets. 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. For now, T-bills remain attractive with a higher yield offering compared to most sovereign bond curves without taking on too much duration risk.
The USD Global Growth and Balanced Fund rebounded 4.5% and 3.9% respectively while the Morningstar peer group climbed 5.3% and 4.3% for each respective fund. The timing of the performance snapshot earlier in the day likely suggests performance numbers should be closer to peer groups given the stark equity market rally thereafter. Our Chinese overweight certainly added value to the overall performance, although a probable lower equity allocation relative to the Morningstar peer group likely prevented further upside. Our most defensive fund with the highest fixed income structure, the Sterling Asset Management Fund, rebounded 3.2%.
We are pleased to announce that a sizeable allocation into Ashburton’s new Global Equity Growth Fund was initiated in the REPAM fund range in January.
 Performance stated in the I share class
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