Multi-Asset Funds: November 2023

11 December 2023

Summary

• The month of November was characterised by a sharp rebound in asset prices with the FTSE All-World Total Return USD Index surging 9.2% while the FTSE World Broad Investment-Grade Bond Index climbed 5.2%. 

   

• The market celebrated the fact that the majority of the up-and-coming fiscal issuance is tilted toward cheaper parts of the US sovereign bond curve.

   

• US headline and core CPI surprised to the downside relative to Bloomberg consensus expectations. This combined with the US Federal Reserve signalling the potential end of the hiking cycle led to lower bond yields around the world.

   

• We saw another amendment to the Bank of Japan’s monetary policy framework where the upper band of 1% on bond yields is now referred to as a reference point rather than a rigid cap.

Market update  

The month of November was characterised by a sharp rebound in asset prices with the FTSE All-World Total Return USD Index surging 9.2% while the FTSE World Broad Investment-Grade Bond Index climbed 5.2%.  

There were many noteworthy asset price catalysts during the month, chief among them was the more favourable fiscal issuance schedule released by the US Treasury in their Quarterly Refunding Announcement report. The market celebrated the fact that the majority of the up-and-coming fiscal issuance is tilted toward cheaper parts of the US sovereign bond curve, i.e. predominately five years out, while simultaneously trying to keep liquidity dynamics relatively stable through sizeable T-bill issuance in the coming quarters. Moreover, US President Joe Biden signed a short-term funding bill to keep government operational until mid-January 2024, alleviating concerns of an imminent government shutdown. It is also worth noting a mild downside surprise in October’s nonfarm payroll employment, relative to Bloomberg expectations, provided some respite to yields as investors pin their hopes on a more accommodative Fed in 2024, due to potentially weaker labour market dynamics.   

Other notable market drivers during the course of the month stemmed from lower-than-expected headline and core US inflation prints. These combined with the US Federal Reserve signalling the potential end of the hiking cycle at their Federal Open Market Committee (FOMC) meeting, led to lower bond yields around the world. This was due to the inextricable link of the US being largely responsible for setting the global cost of capital which also resulted in a weaker dollar. However, we remain cautious that the Fed Funds Futures market is pricing in deeper cuts heading into 2024, than those indicated on the Committee’s dot plot. Accordingly, we will be keenly awaiting new forecasts at the next FOMC meeting.    

In Asian markets, we saw another amendment to the Bank of Japan’s monetary policy framework where the upper band of 1% on bond yields is now referred to as a reference point rather than a rigid cap. This updated policy framework likely attempts to somewhat circumvent the stark depreciatory trend of the Yen, by allowing yields to fluctuate higher according to prevailing market forces. In China, economic data continues to improve and even surpass forecaster’s expectations. Nevertheless, it is still too early to tell if this is indeed the much-anticipated positive turnaround in the Chinese economy investors have been waiting for. It is worth noting that there was a constructive meeting between president Xi and Biden, but more work is needed to see a sustained turnaround in the Chinese economy.  

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 behaviour 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. Moreover, the reactivation of over $1.6 trillion of student debt in October may well present a headwind to future earnings prospects. We remain of the view that economic growth and company earnings expectations are currently too optimistic heading into 2024. However, 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, but the recovery remains fragile at this point. Accordingly, we believe there are selected opportunities, particularly with recent stimulus announcements, although we will be cautious with our asset allocation sizing.   

On the fixed income side, the Fed have signalled that a pro-longed pause is the likely path of the federal funds rate. Accordingly, we have begun to add more fixed-income exposure to the multi-asset funds. However, the market has priced in deeper cuts than those the committee members articulated in their dot plot. Moreover, the labour market remains tight and is likely some distance from what would likely create an official Fed pivot on the trajectory of the federal funds rate. For now, 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 Fund and Global Balanced Fund climbed +6.5%[1] and +5.3%, compared to their Morningstar peer groups which rose +6.3% and +5.6% respectively. Several catalysts out of the US led markets higher over the month, including a more market friendly fiscal issuance schedule, a somewhat dovish Fed amid lower inflation prints, as well as President Joe Biden signing a short-term funding bill to keep government operational until mid-January next year. Our primary equity building blocks, Global Leaders Equity and Global Equity Growth, climbed +6.9% and +7.8% respectively. More capital was diverted to risk assets during the course of the month to take advantage of the aforementioned right tail risk events. Moreover, we have begun to selectively add more fixed income to the funds but remain cautious over deepening rate cuts, priced in by the futures curve beyond the Fed’s own dot plot.