Market update
The year ended on a strong note with the FTSE All-World Total Return USD Index surging 4.8% in December, while the FTSE World Broad Investment-Grade Bond Index climbed 4.2%.
The most noteworthy event in December was the Federal Open Market Committee (FOMC) meeting, where members kept the federal funds rate unchanged, while economic growth estimates were lifted from 2.1% previously to 2.6% in 2023, with projections for the future changing very little. The recent disinflationary impulse has also led to downward revisions in the Fed’s Personal Consumption Expenditure inflation forecasts from 2023 to 2025 on both a headline and core level (stripping out volatile items such as food and energy prices). This led to a downwardly revised projected path for the federal funds rate compared to the FOMC’s previous forecast. We remain cautious that the futures market continues to price in more cuts relative to the Fed’s dot plot in the coming year.
Given the optimism over deepening rate cut projections and a weaker dollar, gold managed to hit all-time highs in December. Moreover, liquidity dynamics have been shored up through a continued drawdown in reverse repurchase agreements as the US Federal Reserve supports the broad-based recovery in asset prices.
In Asian markets, Japan remained steady over the month as ultra-loose monetary policy conditions combined with a relatively upbeat growth backdrop continue to support asset prices despite inflation remaining above the 2% target level. In China, deflation remains the status quo as economic recovery remains fragile. Accordingly, investors are likely waiting for more tangible evidence of a sustained economic recovery aimed at addressing the debt overhang in the property sector and restoring consumer confidence. Against this backdrop, the credit rating agency Moody’s moved China’s A1 debt rating from stable to negative citing concerns over the costs to revive the property sector and effectively bail out state firms and local government.
Fund strategy
Heading into 2024, investors are optimistic, particularly in the US, pricing in a double-digit earnings recovery in the S&P 500 for this year and next. While this is certainly welcomed, we remain positioned in selected opportunities within our internal equity building blocks consisting primarily of Ashburton’s Global Leaders Equity and Global Equity Growth Funds. Themes such as the emergence of Artificial Intelligence (AI) and the potential recovery in China are on our radar.
During December, a new position was established in Nvidia in the Global Leaders Equity Fund that has been a long-standing position in our Global Equity Growth Fund. While the company’s shares were the best performing shares in the S&P500 last year, the share price has increased at a much lower rate relative to several operating metrics such as profit. This has resulted in the shares now meeting the valuation criteria for the Global Leaders strategy. Accordingly, the Global Equity Team believes that there remains a long runway for growth in demand of the chips that Nvidia designs to run AI applications.
One area of the global equity market that has been left behind generally is China. The knock-on impacts of the property sector bust on the domestic economy are relatively well understood. However, international investors continue to struggle with the gauntlet of regulations and a changing operating environment for companies. 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.
The coming 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’ decision makers 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.
On the fixed income side, the Fed have signalled their intent to slash the federal funds rate in the coming years, amid the disinflationary impulse registered more recently. Accordingly, we have begun to add more fixed-income exposure in the multi-asset funds. However, the market has priced in deeper cuts than what committee members have articulated in their dot plot. Moreover, the labour market remains tight and is some distance from what would likely create a scenario of deeper rate cuts, than what is originally forecast. We maintain some allocation to T-bills as they still remain attractive with a yield north of 5% compared to most sovereign bond curves.
Fund performance
The USD Global Growth and Balanced Fund climbed 4.8%[1] and 4.3% compared to their Morningstar peers which increased 4.2% and 3.9% respectively. This can largely be credited to a higher equity allocation over the month and a strong rebound in one of our internal equities building blocks - the Global Equity Growth Fund. We have begun to selectively add more duration in the fixed income allocation to the funds but remain cautious over deepening rate cuts priced in by the futures curve beyond the Fed’s own dot plot.
[1] Performance stated in the I share class