Ashburton Dollar Asset Management Feeder Fund

Steady returns through all conditions

View all posts

Multi-Asset Funds: February 2023

Summary

  • After financial conditions loosened at one of the fastest paces on record in January, they tightened somewhat in February amid a higher-than-anticipated US CPI print leading to an upward re-pricing of the federal funds rate path in the futures curve.

  • China M2 money supply registered an increase of 12.6% year-on-year for the January release, above Bloomberg market expectations of 11.7% and continues to highlight that liquidity injections from the People’s Bank of China remain supportive. 

  • The UK Prime Minister also reshuffled his cabinet with the focus geared toward energy security, as well as science and technology among other department restructurings and ministerial appointments. 

 

Market update  

After financial conditions loosened at one of the fastest paces on record in January, they tightened somewhat in February amid a higher-than-anticipated US CPI print leading to an upward re-pricing of the federal funds rate path in the futures curve. Accordingly, the FTSE All-World Total Return USD Index fell 2.8% while the FTSE World Broad Investment-Grade Bond Index declined 3.2%. 

The upside surprise to US economic data such as retail sales, nonfarm payroll employment, the ISM services PMI and most importantly, January CPI, PCE and PPI prints, may well result in the Fed re-evaluating their pathway for the federal funds rate going forward. Accordingly, the dot plots will likely be lifted at the next Federal Open Market Committee meeting. As such, 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 down to more sustainable levels.

China M2 money supply registered an increase of 12.6% year-on-year for the January release, above Bloomberg market expectations of 11.7% and continues to highlight that liquidity injections from the People’s Bank of China remain supportive. Nevertheless, the downturn in Chinese and Hong Kong equities over the month can likely be ascribed to investor jitters from rising geopolitical tensions between Chinese and US authorities. At this juncture, the macroeconomic environment continues to improve, although we believe more support is needed for a sustainable recovery in 2023. CPI remains well contained at just 2.1% year-on-year as at the end of January which allows scope for further accommodative fiscal and monetary policy stimulus.  

Other noteworthy events that occurred during the month include the announcement of a new Bank of Japan Governor, Kazuo Ueda. His appointment paints an opaque picture over how the yield curve control programme will develop in the coming months as bond yields are consistently trending toward the upper end of the band. The UK Prime Minister also reshuffled his cabinet with the focus geared toward energy security, as well as science and technology among other department restructurings and ministerial appointments.  

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 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 remain of the view that economic growth and company earnings expectations are currently too optimistic. Moreover, we believe that the China re-opening will support the economy and that the equity market standards to benefit barring any further haphazard policy pronouncements or escalated tensions with the US. 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.