Market update
On the political front, US midterm elections were held over the month with the Republicans procuring the House of Representatives, while the Democrats retained control of the Senate. Moreover, ex-US president, Donald Trump, announced his candidacy for the 2024 elections. On the financial markets front, the S&P 500 continued on its counter-trend rally, climbing 5.6% in November amid a lower-than-anticipated October inflation print of 7.7% year-on-year compared to Bloomberg expectations of 7.9% year-on-year. In fact, this resulted in one of the largest one-day stock market gains in history and global bond yields retraced as investors pin their hopes on a Fed pivot. The Fed minutes confirmed the narrative of a slower rate hike cycling going forward, however, a higher-than-anticipated federal funds rate compared to previous expectations was also touted as necessary to bring inflation back to more sustainable levels. At this stage, market participants are pricing in several interest rate cuts in 2023 which is inconsistent with the Fed’s messaging of the federal funds rate staying higher for longer.
In the UK, inflation accelerated to 11.1% year-on-year in October – the highest print since October 1981. To alleviate some inflationary pressures, the UK extended support through the Energy Price Guarantee programme beyond April 2023 for another twelve months. Conversely, however, the freezing of personal income tax allowance until 6 April 2028 will likely reduce consumers’ real income over the medium term.
Chinese equities recovered over the month amid a weaker dollar, the announcement of a 16-point plan to assist its property sector and a 25-basis point cut in the reserve requirement ratio to free up liquidity in the banking sector. Nevertheless, the surge in Covid-19 cases continues to be the primary focal point among policymakers which, to date, has prevented a sustainable re-opening of the economy. At this stage, death rates are low and may well pave the way for easing of restrictions if that remains the status quo.
Overall, markets remain extremely volatile. We are concerned about the slowing global economy combined with deteriorating liquidity conditions increasing intraday volatility in bonds, currencies and equities. Going forward, we continue to believe that central banks will need to strike a fine balance between overtightening into a fragile global economy and quelling price pressures due to the lagged impact of monetary policy on consumer and business spending patterns. The deepening inversion of the spread between the US 10- and 2-year government bond yield beyond even the dot-com bubble era is among several indicators that keep us cautious on the global economy as we head into 2023.
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 fiscal and monetary policy, particularly in the US, will likely be on a restrictive path. In particular, 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. Accordingly, we believe lowering the equity beta in the Ashburton Global Multi-Asset Fund range has been the appropriate response to the current operating environment as we head into the new year, particularly because we are of the view that economic growth and company earnings expectations are currently too optimistic. We prefer sectors with less earnings cyclicality and have a strong Dollar bias. On the fixed income side, we maintain our underweight duration position amid tightening monetary policy dynamics due to elevated inflation levels.
Fund performance
The USD Global Growth and Balanced fund rebounded 3.4%[1] and 2.9% respectively compared to the Morningstar peer groups which climbed 5.4% and 4.4% for each respective fund. It is worth noting that the performance recording of the multi-asset funds was taken at the closing time of the UK stock market, prior to a large intraday rally. Overall, the funds remain defensively positioned with a tilt to lower beta sectors and marginally underweight duration positioning. We perceive value to be concentrated in the T-bill market as yields are meaningfully higher compared more longer dated tenures in the fixed income market. Moreover, the level of duration risk is significantly reduced in these investments. Our most defensive fund with the highest fixed income structure, the Sterling Asset Management Fund, rebounded 2.7%. As we head in 2023, we endeavour on our best efforts to preserve the invested capital of our investors amid a highly volatile and uncertain economic environment.
[1] Performance stated in the I share class