Market update  

It was certainly an eventful start to the year as news from China and the US dominated global market headlines during the month.

In the US, inflation statistics painted a mixed picture highlighting that the recent disinflationary impulse will likely be on a bumpy path toward more sustainable levels. In fact, US Consumer Price Inflation (CPI) surprised to the upside, accelerating to 3.4% year-on-year as at the end of December from 3.1% the previous month. Conversely, Producer Price Inflation (PPI) came in at 1% year-on-year in December, a minute change from 0.9% previously, surprising to the downside relative to market expectations. Against this backdrop, the Federal Open Market Committee (FOMC) kept the federal funds range unchanged at 5.25% – 5.5% and indicated that a rate cut in March is unlikely. The Fed Chair, Jerome Powell, stated there is a consensus among FOMC members that rate cuts are appropriate this year. The European Central Bank (ECB) and the Bank of England (BoE) also kept their policy rates unchanged.

While monetary policy easing is certainly an encouraging prospect in the coming months, we remain cautious over the extent to which less restrictive conditions are currently priced in the futures market. Militant attacks in the Red Sea have resulted in supply chain disruptions, particularly in the oil market, with some fears mounting that this may spread further into the Middle East.

From a fiscal perspective, the Biden administration passed yet another short-term package that extends funding until early March, as an impasse remains between Republican and Democratic parties on key spending priorities. The prospective fiscal expenditure in the quarterly refunding estimate was shown to be lower-than-anticipated, while funding of the fiscus is still favoured on the shorter end of the sovereign bond yield curve. This highlights that the Treasury believe there will be policy rate cuts in the coming quarters, which may help to lower the effective interest cost of borrowing in the long run when refinancing is due in a future state.    

On the emerging market front, several noteworthy events took place over the month – particularly in China. The much-anticipated Taiwanese elections were held mid-month in which Lai Ching-te of the Democratic Progressive Party reigned supreme. After the victory, China has been politically inconspicuous given their one region policy. Instead, the focus has shifted toward measures that attempt to stimulate their own economy including slashing the reserve require ratio; introducing special bond issuance aimed at infrastructure spending; easing home-buying restrictions; deliberations over state-owned enterprises using offshore accounts to buy local shares to stem market losses, among other factors. Despite the positive intent, Evergrande received a liquidation order from the Hong Kong court signifying the reality of the debt-ridden woes within the Chinese real-estate sector.

Fund strategy

Heading into 2024, investors were optimistic, particularly in the US, pricing in a robust earnings recovery in the S&P 500 for 2024 and 2025. While this is certainly welcomed, we remain positioned in selected opportunities within our internal equity building blocks consisting primarily of Ashburton’s Global Leaders and Global Equity Growth Funds. Themes such as the emergence of Artificial Intelligence (AI) and the potential recovery in China are on our radar.

During December, a new position was established for Nvidia, in the Ashburton Global Leaders Fund that has been a long-standing position in our Global Equity Growth Fund. While the company’s shares were the best performing shares in the S&P500 last year, the share price has increased at a much lower rate relative to several operating metrics such as profit. This has resulted in the shares meeting the valuation criteria for the Global Leaders Fund strategy. Accordingly, the Global Equity Team believes that there remains a long runway for growth because of the demand for the chips that Nvidia designs to run AI applications. 

One area of the global equity market that has been left behind is China. The knock-on impacts of the property sector bust on the domestic economy are relatively well understood. However, international investors continue to struggle with the gauntlet of regulations and a changing operating environment for companies. Overall, multiples are generally low in the country and international investors are generally very underweight in the region. We remain cautious with our asset allocation sizing toward China but are aware that both investor positioning and multiples historically change rapidly once confidence returns.

This year will be another huge year for geopolitics, with a record number of elections being held globally. Inflation remains among the most important variables for investors to watch, given it tends to drive the central banks’ decisionmakers who raise or lower global liquidity levels, which affect investment markets. Overall, we continue to look for reasonably priced high-quality companies that are compounding their intrinsic value.

On the fixed income side, the Fed have signalled their intent to slash the federal funds rate in the coming months, amid the disinflationary impulse registered more recently. We have begun to add more fixed-income exposure in the multi-asset funds. However, the market has priced in deeper cuts than what committee members have articulated in their dot plot. The labour market remains tight and is some distance from what would likely create a scenario of deeper rate cuts, than what is originally forecast. We maintain some allocation to T-bills as they remain attractive with a yield north of 5% compared to most sovereign bond curves. 

Fund performance

The USD Global Growth Fund climbed 0.4%[1]  while the USD Global Balanced Fund retreated 0.1% compared to its Morningstar peers which rose 0.2% and was flat respectively. The higher equity allocation combined with an underweight to fixed income added value over the month. However, our internal equity building blocks - the Global Equity Growth and Global Leaders Fund – detracted from performance somewhat. We continue to remain cautious over the extent to which the futures market is pricing federal funds rate cuts relative to the Fed’s own dot plot. We prefer to have alternative exposure to a beta neutral long/short fund as a diversifier at this juncture.