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The market accelerated in February with the MSCI World climbing 2.6%, as investors increasingly begin to look toward a post COVID-19 world. In fact, Israel have now fully vaccinated over one third of their population, while the United Arab Emirates sits in second place vaccinating just under one quarter of their population. However, there is still a long way to go, as below one percent of the world’s population have been vaccinated to date according to the latest figures from Our World in Data.
The reflation trade was in full effect during the month as the Reuters/Core Commodity CRB Index rose 9.3%, after rising 3.8% in the previous month and registers as the fourth month of consecutive gain in the index. US energy companies, in particular, had an exemplary month, surging 22.5%. US energy companies are a newly added position to the Ashburton Multi-Asset Fund range, which has boosted performance during the course of the month. In line with climbing growth and inflation expectations, the US 10-year bond yield jumped to a higher 1.4%, a 34bps increase from the previous month. In fact, this yield curve steepening provides impetus to higher net interest margins for financials, as this sector in the US returned 11.6%, this is another newly added position to our funds, and has been a robust contributor to overall performance.
The VIX “fear gauge” index eased to 28 in February from 33.1 at the end of the previous month. However, markets were more jittery toward the end of the month amid sharp yield curve steepening sparking mild fears of a taper tantrum. Nevertheless, the sheer amount of liquidity that is likely to be injected over the coming months will likely continue to prop up asset prices. In fact, US M2 money supply data expanded even further rising 0.6% month-on-month and 26.6% year-on-year in February. 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.
To take advantage of the reflation trade, we increased our exposure to US financial and energy sectors whilst correspondingly reducing exposure to lower beta utilities and staples sectors. The latter sectors tend to underperform in cyclical upswings due to the inelastic nature of their product and services offerings relative to the economic cycle. In addition, the relatively high net debt-to-EBITDA positions in these sectors are adversely affected by yield curve steepening.
We remain constructive on emerging markets amid potential high growth rates in corporate earnings and maintain the overweight position in the Ashburton Multi-Asset Fund range. Our continued bearish view on the dollar amid its counter-cyclicality relative to the global economic upswing may well provide impetus to increasing risk appetite and support continued net inflows to emerging markets. Relatively robust high frequency data and contained COVID-19 cases in Asia also bolster our investment thesis at this point.
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 this year.
The Funds continue to be underweight duration to avoid the adverse effect from curve steepening amid better growth prospects currently being priced into markets.
The Global Growth Fund climbed 1.9% in February, well above its benchmark of 1.2%. Our overweight equity position, particularly in US financials and energy sectors and correspondingly reducing exposure to lower beta utilities and staples sectors lifted overall performance. In addition, our underweight fixed income position also contributed to the alpha realised over the month. The Global Balanced Fund climbed 1.2% and the Sterling Asset Management Fund retreated 0.1%.
 All performance metrics are stated in I Class terms.
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