Multi-Asset Funds: April 2023

Summary

  • Equity markets climbed slightly higher over the month amid better-than-anticipated earnings releases. Fixed income also eked out positive performance over the month despite the level of inflation still being elevated.
  • The treasury general account was replenished somewhat toward the end of the April amid tax receipts from US citizens. 
  • China data remains incredibly resilient as evidenced by the upside surprises in the PMIs, GDP and retail sales. Moreover, inflation is just 0.7% year-on-year as at the end of March which allows scope for further monetary policy easing to take place.
  • OPEC supply cuts have provided some support to oil prices over the month.

Market update   

Equity markets climbed slightly higher over the month amid better-than-anticipated earnings releases. Fixed income also eked out positive performance over the month despite the level of inflation still being elevated. 

We believe that liquidity remains at the epicentre of what will determine asset market directionality going forward – particularly for risk assets. The various Federal Reserve facilities that have been utilised by the banking sector continue to provide ample liquidity to the market which has loosened financial conditions materially of late. This is completely at odds with what the Fed has been articulating and potentially preventing price discovery among asset classes. This may complicate the inflation trajectory at a later stage if this is not sufficiently reversed. However, the treasury general account was replenished somewhat toward the end of the April amid tax receipts from US citizens. While this is negative for liquidity dynamics, it would not be surprising to see this account be drawn down materially going forward. This has certainly been the case in recent months as this account has been used as a source of funds while authorities continue to debate future fiscal limits. 

China data remains incredibly resilient as evidenced by the upside surprises in the PMIs, GDP and retail sales. Moreover, inflation is just 0.7% year-on-year as at the end of March which allows scope for further monetary policy easing to take place. Nevertheless, tensions between China and Taiwan have recently escalated and have likely sparked investor jitters toward the region despite an improving economic backdrop. While it is certainly not our base case that an invasion takes place, it remains a tail risk.  

Other noteworthy events that occurred over the month include OPEC supply cuts which initially provided some support to oil prices but has been short-lived. The first quarter US GDP surprised slightly to the downside coming in at an annualised rate of 1.1% - lower than the Bloomberg consensus estimate of 1.9%. The upside surprise to UK CPI into double digit territory, i.e., +10.1% year-on-year In March, also is concerning. The cost-of-living crisis remains a relatively ubiquitous theme in the western world, particularly as the level of inflation remains some distance from a 2% target. Interestingly, the Bank of Japan removed guidance on their policy rate and are conducting a review of their monetary policy framework over the next year-and-a-half.   
It is worth reiterating that volatility remains the status quo in global markets. We remain highly vigilant that a sharp withdrawal of liquidity and a potential re-pricing of the federal funds rate path in the futures market may result in left tail risk.   

 

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 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 remain of the view that economic growth and company earnings expectations are currently too optimistic. Nevertheless, if liquidity remains plentiful, this may prevent price discovery from emerging in the short-term. 

We believe that the China re-opening will support the economy and that the equity market standards to benefit barring any further haphazard policy pronouncements. At this juncture, we believe that escalating tensions with Taiwan provide investment opportunities rather than a base case for a full-blown invasion. Moreover, ASEAN economies are also a new addition to our equity allocation as they have attractive growth potential. 

On the fixed income side, once peak hawkishness of the Fed has been sufficiently priced in by market participants, and inflation is firmly on a downward trajectory, we will be looking to take a more explicit position on the long end of the curve. This will be to reflect a deterioration in growth dynamics that will begin to overshadow inflation fears. For now, T-bills remain attractive with a higher yield offering compared to most sovereign bond curves without taking on too much duration risk. 

Fund performance 

The USD Global Growth and Balanced Fund rebounded 1.3%1  and 1% respectively compared to their Morningstar peer groups which registered corresponding increases of 0.7% and 0.8%. The tilt toward an absolute return fund holdings was likely the primary reason for the outperformance over the month. Overall, we remain overweight in China given its compelling valuations and improving high frequency data. Moreover, we prefer to hold high cash at this juncture amid attractive T-bill rates. Our most defensive fund with the highest fixed income structure, the Sterling Asset Management Fund, climbed 0.5%.  

 

1Performance stated in the I share class.