Inflation statistics, particularly in the United States, surprised to the upside over April leading to fewer interest rate cuts being priced in 2024. This resulted in global equity market multiples de-rating over the month as well as a stark re-pricing in the bond market. In fact, the futures market is now pricing in a little more than one federal funds rate cut (25 bps) by the end of the year compared to the Federal Open Market Committee’s (FOMC) forecast of three cuts previously. 

In line with market expectations, the US Federal Reserve (Fed) kept the federal funds target range unchanged at 5.25% to 5.5%. Importantly, the FOMC statement expressed concerns that recent inflation statistics have lacked further progress in moving closer to the 2% target. Nevertheless, given that the inflation rate is some distances from its 2022 peak, the Committee opted to reduce the pace of balance sheet runoff by decreasing the monthly redemption cap on US Treasuries from US$60 billion to US$25 billion while keeping the runoff pace of mortgage-backed securities unchanged at US$35 billion per month. Over time this will allow the Fed’s balance sheet to be primarily made up of US Treasury securities.    

In emerging markets, China was a strong performer during April. The MSCI China Index climbed 6.6%, significantly outpacing the 0.4% return of the MSCI Emerging Market Index. This outperformance is likely due to a number of factors including upside surprises to economic data, ongoing monetary policy easing by the People’s Bank of China and less haphazard policy dynamics. 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. We will continue to monitor developments thereof.

Financial conditions remain relatively loose and major global central banks are largely set to ease policy rates in the coming year, although to varying degrees. In fact, Fed Chair, Jerome Powell, explicitly stated in his press conference that another interest rate hike is unlikely despite higher-than-anticipated inflation statistics registered more recently. 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 as was certainly reaffirmed in Powell’s prospective monetary policy actions remaining data dependent. 

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.

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. Overall, multiples are predominately 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.

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 implied federal funds rate path has moved meaningfully higher compared to the beginning of the year and is now above the Fed’s own dot plot. While this has made fixed income yields somewhat more attractive, the labour market remains tight and is some distance from what would likely create a scenario of 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 are still cautious of the overall level of duration in the multi-asset funds for now. 

Fund performance

The USD Global Growth Fund retreated 2.5%[1] while the USD Global Balanced Fund declined 2.3% compared to its Morningstar peers which fell 2.1% and 2% respectively. The downturn is due to the higher equity allocation over the month, which declined more relative to our fixed income holdings. Nevertheless, our relative asset allocation positioning has served us well year-to-date. At this stage, we still prefer to have alternative exposure to a beta neutral long/short fund as a diversifier and remain underweight duration within our fixed-income allocation. 

Disclaimer

Waystone Management Company (Lux) S.A. is regulated by the Commission de Surveillance du Secteur Financier (CSSF) (ref A00000395 & S00000734), Waystone Management Company (Lux) S.A. is a company located in Luxembourg, L-1273 Luxembourg at 19, Rue de Bitbourg. This document is issued by Ashburton (Jersey) Limited (The Investment Manager) which has its registered office at IFC1, The Esplanade, St Helier, Jersey JE4 8SJ, Channel Islands and is regulated by the Jersey Financial Services Commission. Ashburton Investments is a registered trading name of Ashburton (Jersey) Limited. In the event a potential investor requires material risks disclosures for the foreign securities included in a portfolio, the manager will upon request provide such potential investor with a document, outlining potential constraints on liquidity & repatriation of funds; Macroeconomics risk; Political risk; Foreign Exchange risk; Tax risk; Settlement risk; and Potential limitations on the availability of market information. The value of participatory interests and the income from them may go down as well as up and is not guaranteed. Past performance is not necessarily a guide to the future performance. Where an investment involves exposure to a currency other than that in which it is denominated, changes in rates of exchange may cause the value of the investment to go up or down. CIS portfolios are traded at ruling prices and can engage in borrowing and scrip lending. A full detailed schedule of fees, charges and commissions is available from Ashburton on request and incentives may be paid and if so, would be included in the overall costs. The manager does not provide any guarantee either with respect to the capital or the return of a portfolio. The manager has a right to close the portfolio to new investors in order to manage the portfolio more efficiently in accordance with its mandate. This document does not constitute an offer or solicitation to any person in any jurisdiction in which Ashburton Investments is not authorised or permitted to communicate with potential investors, or to anyone who would be an unlawful recipient. The original recipient is solely responsible for any actions in further distribution of this document and should be satisfied in doing so that there is no breach of local legislation or regulations. This is a marketing communication. Additional information about this product, including brochures, application forms and annual or half-yearly reports, can be obtained from the Manager, free of charge, and from the website: www.ashburtoninvestments.com. In South Africa, the Fund(s) is/are approved for promotion under section 65 of the Collective Investment Schemes Control Act 2002. The Fund Prospectus, and further information including pricing and changes, may be viewed at the Fund’s representative office in South Africa: Ashburton Management Company (RF) Proprietary Limited (“Ashburton CIS”), 3 Merchant Place, 1 Fredman Drive, Sandton 2196. Ashburton CIS is an approved collective investment schemes manager regulated by the Financial Sector Conduct Authority and a full member of the Association of Saving and Investments South Africa.