May 17, 2023
Summary
- Equity markets rallied slightly over the month amid better-than-expected earnings releases. Fixed income also maintained a positive performance throughout the month, despite the level of inflation still being high.
- The general treasury account was replenished somewhat in late April amid tax receipts from US citizens.
- China's data remains remarkably resilient, as evidenced by positive surprises in the PMIs, GDP and retail sales. Furthermore, inflation is only 0.7% year-on-year at the end of March, which opens up room for further easing of monetary policy.
- OPEC's supply cuts provided some support to oil prices throughout the month.
market update
Equity markets rallied slightly over the month amid better-than-expected earnings releases. Fixed income also maintained a positive performance throughout the month, despite the level of inflation still being high.
We believe liquidity remains at the epicenter of what will determine asset market direction going forward – particularly for risky assets. The various Federal Reserve facilities that have been utilized by the banking industry continue to provide ample liquidity to the market, which has eased financial conditions substantially of late. This is completely at odds with what the Fed has been articulating and potentially preventing price discovery across asset classes. This could complicate the inflation path at a later stage if this is not sufficiently reversed. However, the general treasury account was replenished somewhat in late April amid tax receipts from US citizens. While this is negative for liquidity dynamics, it would not be surprising to see this account materially withdrawn going forward. This has certainly been the case in recent months, as this account has been used as a source of funding as authorities continue to debate future tax caps.
China's data remains remarkably resilient, as evidenced by positive surprises in the PMIs, GDP and retail sales. Furthermore, inflation is only 0.7% year-on-year at the end of March, which opens up room for further easing of monetary policy. However, tensions between China and Taiwan have risen recently and likely sparked investor jitters about the region despite a better economic backdrop. While it's certainly not our base case that a break-in occurs, it remains a tail risk.
Other notable events that occurred throughout the month include OPEC supply cuts, which initially provided some support to oil prices, but were short-lived. US GDP for the first quarter surprised slightly to the downside, coming in at an annualized rate of 1.1% - below Bloomberg's consensus estimate of 1.9%. The upside surprise for the UK CPI into double-digit territory, ie +10.1% year-on-year in March, is also worrying. The cost of living crisis remains a relatively ubiquitous theme in the western world, mainly because the level of inflation remains far from a 2% target. Interestingly, the Bank of Japan has removed the guidance on its interest rate and is conducting a review of its monetary policy framework over the next year and a half.
It is worth reiterating that volatility remains the status quo in global markets. We remain highly vigilant that a sharp liquidity drawdown and possible reassessment of the federal funds rate path in the futures market could result in left-tail risk.
fund strategy
Our main concern going forward is whether the resilience of the company's earnings can be extrapolated into the future. We believe this could be difficult, as the lagged effect of tighter monetary policy actions will likely start to be reflected in changes in consumer behavior patterns. Higher borrowing costs for businesses and consumers are likely to dampen economic activity, particularly in related discretionary areas, as economic agents seek to rein in spending to tighten their balance sheets and income statements. Households are drawing on various credit instruments, particularly credit card debt, which is currently on the rise to support short-term spending prospects.Thus, we maintain the view that economic growth and corporate earnings expectations are currently very optimistic. However, if liquidity remains plentiful, this may prevent price discovery from emerging in the short term.
We believe that reopening China will support the economy and that stock market patterns will benefit, preventing any further random political pronouncements. At this juncture, we believe that escalating tensions with Taiwan provide investment opportunities rather than a base case for an all-out invasion. Furthermore, ASEAN economies are also a new addition to our capital allocation as they have attractive growth potential.
On the fixed income side, once the peak of Fed hawkishness has been sufficiently priced in by market participants and inflation is firmly on a downward path, we will look to take a more explicit stance on the long end of the curve. This will reflect a deterioration in growth momentum that will start 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
O USD Global Growth and Balanced Fund recuperou 1,3%1and 1%, respectively, compared to its Morningstar peer groups, which posted corresponding increases of 0.7% and 0.8%. The bias towards an absolute return on fund holdings was likely the main reason for the outperformance over the month. Overall, we remain overweight in China due to its strong valuations and improving high frequency data. In addition, we prefer to keep cash high at this time amid attractive treasury bill rates. Our most defensive fund with the largest fixed income structure, the Sterling Asset Management Fund, was up 0.5%.
1Performance declared in the Sharing class.
- Equity markets rallied slightly over the month amid better-than-expected earnings releases. Fixed income also maintained a positive performance throughout the month, despite the level of inflation still being high.
- The general treasury account was replenished somewhat in late April amid tax receipts from US citizens.
- China's data remains remarkably resilient, as evidenced by positive surprises in the PMIs, GDP and retail sales. Furthermore, inflation is only 0.7% year-on-year at the end of March, which opens up room for further easing of monetary policy.
- OPEC's supply cuts provided some support to oil prices throughout the month.
market update
Equity markets rallied slightly over the month amid better-than-expected earnings releases. Fixed income also maintained a positive performance throughout the month, despite the level of inflation still being high.
We believe liquidity remains at the epicenter of what will determine asset market direction going forward – particularly for risky assets. The various Federal Reserve facilities that have been utilized by the banking industry continue to provide ample liquidity to the market, which has eased financial conditions substantially of late. This is completely at odds with what the Fed has been articulating and potentially preventing price discovery across asset classes. This could complicate the inflation path at a later stage if this is not sufficiently reversed. However, the general treasury account was replenished somewhat in late April amid tax receipts from US citizens. While this is negative for liquidity dynamics, it would not be surprising to see this account materially withdrawn going forward. This has certainly been the case in recent months, as this account has been used as a source of funding as authorities continue to debate future tax caps.
China's data remains remarkably resilient, as evidenced by positive surprises in the PMIs, GDP and retail sales. Furthermore, inflation is only 0.7% year-on-year at the end of March, which opens up room for further easing of monetary policy. However, tensions between China and Taiwan have risen recently and likely sparked investor jitters about the region despite a better economic backdrop. While it's certainly not our base case that a break-in occurs, it remains a tail risk.
Other notable events that occurred throughout the month include OPEC supply cuts, which initially provided some support to oil prices, but were short-lived. US GDP for the first quarter surprised slightly to the downside, coming in at an annualized rate of 1.1% - below Bloomberg's consensus estimate of 1.9%. The upside surprise for the UK CPI into double-digit territory, ie +10.1% year-on-year in March, is also worrying. The cost of living crisis remains a relatively ubiquitous theme in the western world, mainly because the level of inflation remains far from a 2% target. Interestingly, the Bank of Japan has removed the guidance on its interest rate and is conducting a review of its monetary policy framework over the next year and a half.
It is worth reiterating that volatility remains the status quo in global markets. We remain highly vigilant that a sharp liquidity drawdown and possible reassessment of the federal funds rate path in the futures market could result in left-tail risk.
fund strategy
Our main concern going forward is whether the resilience of the company's earnings can be extrapolated into the future. We believe this could be difficult, as the lagged effect of tighter monetary policy actions will likely start to be reflected in changes in consumer behavior patterns. Higher borrowing costs for businesses and consumers are likely to dampen economic activity, particularly in related discretionary areas, as economic agents seek to rein in spending to tighten their balance sheets and income statements. Households are drawing on various credit instruments, particularly credit card debt, which is currently on the rise to support short-term spending prospects.Thus, we maintain the view that economic growth and corporate earnings expectations are currently very optimistic. However, if liquidity remains plentiful, this may prevent price discovery from emerging in the short term.
We believe that reopening China will support the economy and that stock market patterns will benefit, preventing any further random political pronouncements. At this juncture, we believe that escalating tensions with Taiwan provide investment opportunities rather than a base case for an all-out invasion. Furthermore, ASEAN economies are also a new addition to our capital allocation as they have attractive growth potential.
On the fixed income side, once the peak of Fed hawkishness has been sufficiently priced in by market participants and inflation is firmly on a downward path, we will look to take a more explicit stance on the long end of the curve. This will reflect a deterioration in growth momentum that will start 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
O USD Global Growth and Balanced Fund recuperou 1,3%1and 1%, respectively, compared to its Morningstar peer groups, which posted corresponding increases of 0.7% and 0.8%. The bias towards an absolute return on fund holdings was likely the main reason for the outperformance over the month. Overall, we remain overweight in China due to its strong valuations and improving high frequency data. In addition, we prefer to keep cash high at this time amid attractive treasury bill rates. Our most defensive fund with the largest fixed income structure, the Sterling Asset Management Fund, was up 0.5%.
1Performance declared in the Sharing class.
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