Multi-Asset Funds: May 2023

Market update   

The US debt ceiling was at the epicentre of investors’ attention in May, particularly as the treasury general account which has been used as a primary source of funding for the fiscus in recent weeks neared depletion. Talks between Republicans and Democrats were more progressive toward the end of the month and in the early part of June, the debt ceiling was indeed lifted. Accordingly, the new bill highlights that federal spending is expected to be covered until the end of 2024. As such, it is encouraging to see the subsequent decline in US CDS spreads. However, the last time the US meaningfully replenished their treasury general account commenced at the beginning of 2022 which resulted in a sudden and sharp withdrawal of liquidity which certainly contributed to the risk off market backdrop last year. It is worth noting that the treasury general account will likely be replenished with much higher interest rates increasing the US government’s debt servicing profile.    

While inflation in the US surprised to the downside in the latest print, core inflation - excluding volatile items such as food and energy - remains historically elevated and will likely keep the US Federal Reserve from slashing the federal funds rate in the near term. Moreover, the labour market at this stage remains extremely tight as evidenced by the consistent sequential expansion in nonfarm payroll data, low initial jobless claims numbers and high level of job openings. In our view, this will likely keep the Fed from easing monetary policy prematurely and this stance was reaffirmed in the most recent FOMC minutes. Accordingly, we believe that the Fed will likely commit to a restrictive policy path for at least the remainder of this year to quell the inflation backdrop by weakening labour market statistics that would be more congruent with an inflation level of 2%.   

While the FTSE All World Total Return Index edged down 1%, the artificial intelligence furore saw stocks such as Nvidia surge 36.3% in May. This was in spite of higher rates over the month which resulted in the FTSE World Government Bond Index falling 2.2%.   

More recently, China’s data on a coincident to lagging indicator basis has disappointed relatively to market expectations. In addition, covid-19 cases have re-accelerated and likely resulted in renewed investors jitters within the region given the stringent lockdowns the government have erected in the past. Nevertheless, the mobility and credit impulse data are relatively strong and do point toward an improvement in the overall growth trajectory going forward. We anticipate the recovery to certainly be a bumpy one, but with historically cheap valuations, we believe there exists meaningfully opportunities in the Chinese market. 

Going forward, we are even more vigilant over a sudden withdrawal of liquidity that can affect valuations in the US market going forward. This is largely due to the view that the treasury cash account will likely have a perverse effect on liquidity in the future given the need replenishment through the issuance of debt in the coming months.  

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. However, the recent re-acceleration in Covid-19 cases and slowing of coincident to lagging data has largely sparked investor jitters toward the region. Nevertheless, the mobility and credit impulse data continue to improve and highlight that a potential recovery, albeit fragile at this juncture, is still on the horizon.  

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 

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¹ Performance stated in the I share class