• The inauguration of the new US President, Joe Biden, and a Democratic-led House and Senate sets the tone for more fiscal stimulus.
• The US 10-year yield breached the 1% mark for the first time since March last year.
• Encouragingly, in the US, most sectors that have released sales and earnings results this reporting season have surprised to the upside.
• Further liquidity was injected into markets over the month as evidenced by the most recent US M2 money supply data expanding a further 0.5% after rising 1.3% in December.
The Georgia senate runoffs were in focus heading into the new year. The outcome certainly surprised investors with the US 10-year yield breaching the 1% mark for the first time since March last year, as markets began to price in a more pronounced economic recovery. This can largely be ascribed to a stronger fiscal impulse with a Democratic-led House and Senate, and the resultant impact on stronger inflation expectations. In fact, $1.9 trillion worth of fiscal stimulus has been proposed by the new US President, Joe Biden, which will certainly help cushion the blow in these turbulent times.
The MSCI World Index took a breather in January, retreating 1% after climbing 4.3% in December. Similarly, the VIX “fear gauge” ended the month off at a higher 33.1 compared to 22.8 in the previous month, although still some distance from last year’s March peak of 82.7. The reflationary theme continued on its upward trend, as evident in the MSCI World Energy Index climbing 3% in January after rising 3.8% the month before. Similarly, the Reuters/Core Commodity CRB Index rose 3.8% after increasing 4.8% in December.
We believe that equity markets will continue to be emboldened by the rollout of the Covid-19 vaccine and a strong economic recovery. Encouragingly in the US, most sectors that have released sales and earnings results this reporting season have surprised to the upside setting the tone for a more upbeat year.
Further liquidity was injected into markets over the month, as evidenced by the most recent US M2 money supply data expanding a further 0.5% after rising 1.3% in December. We believe that financial conditions will likely remain loose as we head into the new year as articulated by several major global central banks’ accommodative monetary policy stance.
We remain constructive on emerging markets amid potential high growth rates in corporate earnings and maintain our overweight position. We continue to believe that the dollar will depreciate as risk appetite increases allowing for attractive entry point into emerging markets. However, we are aware that overextended contract short positioning on the dollar may well result in a mild pullback. If this occurs, we believe it will likely be transitory. Relatively robust high frequency data and contained Covid-19 cases in Asia also bolster our investment thesis at this point. These factors are also a fundamental underpin to our overweight positioning in emerging market hard currency debt.
The rollout of a viable vaccine this year will certainly be a positive catalyst to the global economy, although this will likely take some time to be rolled out at scale. Nevertheless, we are emboldened by further progress on this front and the positive boost to equity markets that this will have. An accelerated shift to “risk on” sentiment should also be beneficial to our current positioning. Overall, we are encouraged by the more upbeat outlook and believe that the easing of lockdown restrictions combined with the unwinding of precautionary household savings will catalyse equity markets heading into 2021.
The funds continue to be modestly underweight duration to avoid the adverse effect from curve steepening amid better growth prospects currently being priced into markets. Nevertheless, we believe that there will unlikely be a material steepening in the yield curve as the US Federal Reserve continues to intervene in the bond market.
The Global Growth Fund climbed 0.1% in January as its benchmark retreated 0.3%. Our overweight equity positioning, particularly in emerging markets, and underweight government bonds positions continued to lift overall performance. The Global Balanced Fund edged down 0.1% and the Sterling Asset Management Fund climbed 0.1%.
 All performance metrics are stated in I Class terms.