View all posts

Multi-Asset Funds: October 2023

Summary

 

  • Conflict in the Middle East took centre stage over the month as the Palestinian militant group Hamas initiated an attack on Israel in early October.

     

  • The US House passed a short-term bill that should fund the fiscus until 17 November 2023 preventing an imminent government shutdown.

     

  • US CPI and PPI data both surprised to the upside registering 3.7% and 2.2% year-on-year for September compared to Bloomberg consensus expectations of 3.6% and 1.6% respectively.

     

  • China’s economic data has been better-than-expected leading to an upside surprise in the third quarter GDP print coming in at 4.9% year-on-year relative to Bloomberg consensus expectations of 4.5%.

 

Market update  

Conflict in the Middle East took centre stage over the month as the Palestinian militant group Hamas initiated an attack on Israel in early October. Since then, several casualties have emerged through tit for tat measures. This sparked some jitters in the market over concerns of an even more widespread conflict ensuing as investors flocked to safe haven assets like gold.

On the political front, the US House passed a short-term bill that should fund the fiscus until 17 November 2023 preventing an imminent government shutdown. House Speaker Kevin McCarthy was removed through a motion to vacate filed by Matt Gaetz in the Republican Party. Tensions between Democrats and Republicans remain heated over fiscal affairs.

On the economic front, inflation remains the focal point for global investors. US CPI and PPI data both surprised to the upside registering 3.7% and 2.2% year-on-year for September compared to Bloomberg consensus expectations of 3.6% and 1.6% respectively. This combined with an unwavering level of resilience in US nonfarm payroll employment, retail sales expenditure, tight global crude oil supplies and China dumping US treasuries have thrusted nominal yields higher across the Sovereign bond yield curve. Fiscal imprudence in the US has also certainly not helped with a surprisingly wide budget deficit in the midst of elevated inflation levels.  

More recently, China economic data has been better-than-expected leading to an upside surprise in the third quarter GDP print coming in at 4.9% year-on-year relative to Bloomberg consensus expectations of 4.5%. This may provide nascent evidence that previously erected stimulatory measures are starting to boost their economy. Moreover, legislature was approved to lift the fiscal deficit to 3.8% of GDP this year – meaningfully wider than the 3% limit set by the government in March. While we remain cautiously optimistic, it is still too early to tell if this is the much-anticipated positive turnaround in the Chinese economy investors have been waiting for.

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. We remain of the view that economic growth and company earnings expectations are currently too optimistic. 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 stands to benefit barring any further haphazard policy announcements. We believe there are selected opportunities on the horizon, particularly with recent stimulus announcements, 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 compared to most sovereign bond curves without taking on too much duration risk.

Fund performance

The USD Global Growth Fund and Global Balanced Fund fell 3.1%[1] and 2.5% each compared to their Morningstar peer groups which registered a downturn of 2.8% and 2.2% respectively. The retracement can largely be ascribed to a 6% contraction in our newly launched Global Equity Growth Fund and a 3.9% downturn in the Global Leaders Equity Fund respectively. While detractors over the month, these funds have a successful track record for our clients and volatility is expected month-to-month. However, our relatively low allocation to fixed-income, notable sizing toward an alternative long-short fund position, high dollar cash positioning and commodity allocation, as well as underweight to emerging markets and Europe added value over the month. Our most defensive fund with the highest fixed income structure, the Sterling Asset Management Fund, fell 2.2%.