Summary
- After retreating 4% in September, global markets rebounded strongly as the FTSE All-World Index surged 5%.
- The debt ceiling limit was lifted by US$480 billion in the US to enable the Treasury Department to continue financing government operations through 3 December 2021.
- The Fed minutes highlighted that the illustrative path for tapering involves a potential reduction of $5 billion in agency mortgage-backed securities and US$10 billion in Treasury securities per month of which would come to an end by the middle of next year.
- According to Our World in Data, 38.7% of the world population were fully vaccinated against COVID-19 as of 31 October 2021, compared to 33.8% in the previous month.
Market update
After retreating 4% in September, global markets rebounded strongly as the FTSE All-World Index surged 5% in October. Earnings have continued to surprise to the upside likely offering support to the market. It is also worth noting that from a seasonality perspective, global equity markets are usually strong during the last quarter of the year. Global bonds, however, sold off as the Bloomberg Global-Aggregate Total Return Index fell 0.2% in October.
Both fiscal and monetary policy uncertainty were somewhat alleviated in October which arguably fostered a more favourable investment climate. The debt ceiling limit was lifted by US$480 billion in the US to enable the Treasury Department to continue financing government operations through 3 December 2021. Nevertheless, either an increase or a suspension of the debt limit must be approved to prevent a sovereign default. Importantly, the Fed minutes reaffirmed our view that plans to taper will likely be formally announced before year-end. The illustrative path as described in the minutes highlighted a potential reduction of US$5 billion in agency mortgage back securities and $10 billion in Treasury securities per month, of which would come to an end by the middle of next year. In addition, financial markets have begun to price in rate hikes next year according to federal funds futures rates.
The market shifted to a risk-on tone with higher beta sectors outperforming lower beta sectors during the month. Similarly, commodities were strong over the month with the Bloomberg Commodity Index climbing 2.6% as a broadening of inflationary pressures continued. The persistence of broad-based commodity strength and supply chain bottlenecks continue to pose upside risk to the inflation outlook as we delve deeper into the final quarter of the year. Nevertheless, global cross asset volatility remains well contained suggesting that investment climate remains favourable for now.
It is worth noting that China has been a notable outperformer in the most recent month against its emerging market peers. While this is suggestive that adverse news flow has seemingly filtered its way into the price in recent months, we are cautious before taking on a firmer stance as economic data needs to improve. Nevertheless, repo injections from Chinese authorities have been relatively buoyant of late.
The global vaccination rollout continues to make significant headway and is a positive for the global economy. According to Our World in Data, 38.7% of the world population were fully vaccinated as of 31 October 2021, compared to 33.8% in the previous month.
Fund strategy
We believe that there is further upside in broader equity markets, particularly as fiscal and monetary policy uncertainty has been somewhat alleviated. Similarly, notable downward revisions to fourth quarter economic growth leave room for upside surprises as we progress into the close of the year, particularly as lockdown restrictions are expected to ease further. We are still particularly selective in our positioning as event risk remains high.
We continue to believe that a more material recovery is expected on a full-year basis as precautionary savings fully unwind, and as economic activity recovers off a low base. As the vaccine rollout continues, it’s a positive for the global economy as lockdown restrictions continue to be lifted. The inflation trajectory at this juncture is complicated by the degree to which escalating rental and housing costs will begin to reflect in shelter prices (roughly a third of the inflation basket in the US) and poses upside risk to future US CPI prints. A formal tapering plan is expected to be announced by the Federal Reserve at the next FOMC meeting.
We believe that yield curve movements will likely have a mild upward bias, particularly as we anticipate a resolution around the US debt ceiling in the coming weeks. Accordingly, we have an underweight duration position in the Ashburton Multi-Asset fund range.
Fund performance
The Global Growth Fund rose 2.9% against its Morningstar peer group of 2.6% largely due to an overweight equity and underweight duration position. Similarly, other Multi asset funds such as the USD Global Balanced Fund returned 2.1% and the Sterling Asset Management Fund climbed 1%.
[1] All performance metrics are stated in I Class terms.