Market update

US inflation data was in focus over the month as June CPI slowed to 3% year-on-year from 4% the previous month and below Bloomberg consensus expectations of 3.1%. Despite core inflation (excluding volatile items such as food and energy) slowing to 4.8% year-on-year in June from 5.3% the previous month, the print remains untenably high and will likely keep the Fed from easing rates anytime soon. Moreover, favourable CPI base effects will dissipate in the coming months and inflation may potentially re-accelerate if financial conditions are too loose. 

Despite the Fed keeping the federal funds rate on hold in July, the message remained unchanged in keeping the policy rate higher for longer – especially as labour market conditions remain tight. The ECB, however, raised the refinancing rate by a further 25bps to 4.25% - the highest level since October 2008. Despite the Bank of Japan’s accommodative efforts, the central bank shifted the goal posts by referring to their yield curve control limit of 0.5% on their 10-year bond as a reference point rather than a rigid limit. 

Overall, stocks remain supported over the month through a continued valuation multiple re-rating despite bond yields ticking higher. In our opinion, liquidity conditions remain too loose and have thrusted equity markets higher as a result. Going forward, however, this may well complicate the inflation trajectory, especially given the recent surge in oil prices. 

It is worth noting that China lent support to their debt-ridden property sector by offering a one-year extension on loans due before 2024 to ease cashflow and solvency concerns. Despite ample support from monetary policy, fiscal authorities will likely need to foster confidence through a more measured and business friendly policy framework going forward to lift potential economic growth amid several haphazard policy pronouncements in recent months. 

Going forward, we remain of the view that historic global liquidity injections continue to mask asset price discovery. We are closely monitoring the resultant impact on any perverse effects of a reduction in global liquidity in the coming months given the need to replenish the US treasury general account. Accordingly, we believe that selected opportunities will emerge with better entry points.

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. Moreover, the reactivation of over $1.6 trillion of student debt in October may well present a headwind to future earnings prospects. Accordingly, we remain of the view that economic growth and company earnings expectations are currently too optimistic. Nevertheless, if liquidity remains plentiful, this may prevent price discovery from emerging in the short-term. 

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. However, the recent slowing of coincident to lagging economic data has disappointed relative to investors’ expectations. Nevertheless, we believe there are still selected opportunities on the horizon and will be cautious with our asset allocation sizing.

On the fixed income side, once peak hawkishness of the Fed has been sufficiently priced in by market participants, labour market weakness emerges 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. 

Fund performance 

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¹ Performance stated in the I share class