In line with market expectations, the Fed kept the federal funds target range unchanged at 5.25% to 5.5%. However, some noteworthy forecast revisions took place. Encouragingly, economic growth projections were lifted over the forecast horizon, although core inflation estimates were raised to 2.6% this year from a previously forecasted 2.4%. This likely resulted in committee members forecasting a shallower rate cutting cycle over the next two years. Nevertheless, the market seemingly took comfort in the fact that three rate cuts are still expected this year as risk assets rallied post the announcement. In fact, gold hit all-time highs, yet again, during the month as real rates cooled somewhat and as liquidity levels remain buoyant.

After nearly a decade, the BoJ voted 7-2 to end the era of negative interest rates lifting their policy rate from negative 0.1% to a range of 0% to 0.1%. This marks the first policy rate hike since 2007 as Japan’s largest labour union lifted wages by 5.3% which registers as the swiftest increase in 33 years. Despite also ending purchases of Exchange Traded Funds (ETFs), Real Estate Investment Trusts (REITs) and explicit targets around its yield curve control programme, the BoJ gave comfort to investors that should long-term rates rise rapidly that they will not hesitate to intervene in the fixed-income market and that financial conditions will remain accommodative. On balance, the market welcomed such dovish intent as the Yen continued to depreciate into month-end.

China’s Politburo released several targets heading into 2024. The GDP growth target was set at 5% - unchanged from the 2023 target. However, the fiscal deficit target of just 3% suggests that more support will likely need to come from monetary policy to achieve this growth projection. While provisions were made to bond issuances, their nominal amounts are small in relation to GDP levels. Overall, policies that foster a restoration of consumer confidence and support to the property sector will likely go a long way in achieving desirable growth outcomes. Accordingly, we will continue to monitor developments thereof.   

Overall, financial conditions remain relatively loose and major global central banks are largely set to cut policy rates in the coming year, although to varying degrees. Central banks will need to strike a fine balance between the magnitude of interest rate cuts and potentially reigniting inflation, particularly in the Western world. This quandary will likely remain at the forefront of monetary policy decisions this year. 

Fund strategy

Investors are optimistic, particularly in the US, pricing in a robust earnings recovery in the S&P 500 this year and next. Moreover, several research houses are also starting to lift year-end price targets. 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.

Our position in Nvidia has had an exemplary run this year as part of a core holding in both our Ashburton Global Leaders Fund and Global Equity Growth Fund. We are delighted that it delivered another better-than-expected earnings update and the stock remains as one of the best performing shares on the S&P 500 this year. Despite the continued upturn in the share price, several operating metrics such as profit continue to increase at a faster pace making valuation metrics even cheaper. Going forward, 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. 

China has displayed nascent evidence of a rebound in equity market performance more recently. We remain encouraged by the front-loading of policy supportive measures at the beginning of this year. 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.

The Fed have signalled their intent to slash the federal funds rate in the coming months amid the disinflationary impulse registered more recently. We are encouraged that the implied policy rate path from the future market is moving closer to the Fed’s dot plot. Nevertheless, the labour market remains tight and is some distance from what would likely create a scenario of deep rate cuts in the coming months. Accordingly, we maintain some allocation to T-bills as they remain attractive with a yield north of 5% and remain cautious of the overall level of duration in the multi-asset funds. 

Fund performance

The USD Global Growth Fund climbed 2.8%[1] while the USD Global Balanced Fund increased 2.3% compared to its Morningstar peers which rose 2.6% and 2.1% respectively. The higher equity allocation combined with outperformance in one of our internal equity building blocks, the Global Equity Growth Fund, added value over the month. Accordingly, we have delivered first and second quartile performance for each respective fund this year. Nevertheless, we remain cautious over the extent to which the Fed will cut the federal funds rate this year. We prefer to have alternative exposure to a beta neutral long/short fund as a diversifier and remain underweight duration within our fixed-income allocation.

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