Multi-Asset Funds: March 2023
Investors focus shifted to arguably the most important event of the year, the Federal Open Market Committee meeting. While the Fed hiked the federal funds rate by 25bps - in line with market expectations - there were also several important updates in the latest projection material worth noting as we head into 2023. Growth forecasts were downwardly revised again to just 0.4% this year from 0.5% previously, while Personal Consumption Expenditure (PCE) inflation was upwardly revised to 3.3% (3.1% previously). The stickiness of inflation remains evident in the mind of the FOMC members as evidenced by the 3.6% projection on core PCE in 2023 from 3.5% previously forecast. While the median federal funds rate forecast has stayed at 5.1% for 2023, the 2024 forecast has been lifted to 4.3% from 4.1%.
To address fragilities in the global banking sector, the Fed has increased the frequency of their central bank swap lines with other major central banks. Moreover, borrowing at the Fed’s discount window has recently reached all-time highs in order to inject liquidity into the banking sector. Similarly, the usage of the Fed's new Bank Term Funding Program and lending to depository institutions has been meaningful. These policy actions come on the back of deposit flight from regional banks in the US amid downward sticky deposit rates, concerns over improper risk management of banks’ asset and liabilities exposure to interest rate movements and other governance concerns.
While the Fed intends to tighten financial conditions heading into 2023, roughly sixty percent of their balance sheet reduction efforts have been reversed in March alone in order to stabilise the banking sector. In fact, the recent liquidity injection will likely embolden the Fed to be on a restrictive path as we progress into the year as tightening financial conditions will be needed to bring inflation down to more sustainable levels. Similar sentiments will likely be shared by the Bank of England and almost certainly the Eurozone Central Bank which is currently grappling with all time high core inflation.
Developed market inflation remains high, particularly core inflation metrics which exclude volatile items such as food and energy prices. This underpins our view that major global central banks will indeed keep their policy rates higher for longer. However, in regions such as China, consumer price inflation last registered a reading of just 1% year-on-year in February as the economy continues re-opening. This allows sufficient scope for monetary authorities to carry on implementing accommodative monetary policy. In fact, the People’s Bank of China recently slashed the reserve requirement ratio by 25 bps which will shore up liquidity by allowing commercial banks to lend more
Volatility remains the status quo in global markets, particularly in the bond market as the MOVE index - implied volatility for bond yields - reached the highest reading since the 2008 global financial crisis. This can be ascribed to the uncertainty over the future path of interest rates on the back of bank contagion fears.
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 stands to benefit barring any further haphazard policy pronouncements. 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 both rebounded 2.2% compared to Morningstar peer groups of a 1.3% for each respective category. This can likely be ascribed to a higher weight in fixed-income securities relative to the peer group over the month amid the rally in bonds over the month. Our most defensive fund with the highest fixed income structure, the Sterling Asset Management Fund, climbed 1.6%. Given the improving high frequency data in China and compelling valuations, we maintain our overweight position to the region and prefer to hold high cash at this juncture amid attractive T-bill rates.
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