In this note, we provide you with an update on significant recent developments and our views. Comments on recent performance are not indicative of future performance. As our investment strategy and views are defined with a long-term horizon in mind, these developments may not mean changes to your portfolio. Please contact your advisor for the latest update on your portfolio.
Markets at a glance
Markets – Risk assets rose and bonds fell last week
- US equities led an equity rebound (S&P 500 +3.6%) following three weeks of declines. Markets were lifted by healthcare, consumer discretionary and tech stocks in particular. Stocks were stronger despite Fed Chair Powell’s hawkish comments on interest rates (see below), Other equity markets lagged behind, including European equities (STOXX 600 up 1.1%), UK equities (up 1.0%) and EM equities (flat as Chinese equities lagged).
- Equities outperformed bonds, with US Treasury yields rising across the curve (2-year +17 bps and 10-year UST +12bps), and the 10-year treasury yield testing June highs at just below 3.5% ahead of US inflation data that is due on Tuesday; a downside surprise in the inflation reading would likely bring bond yields lower.
- The 10-year German Bund is also trading close to June highs at c1.75%. Peripheral spreads narrowed despite the ECB’s ‘jumbo’ rate hike helped by no further mention of quantitative tightening at the ECB meeting. UK gilt yields rose the most on news the new UK government will deliver a fiscal package to tackle the country’s energy crisis worth c6.5% of GDP, funded by new borrowing.
Past performance is not a reliable indicator of future returns.
Central banks & inflation – ECB promised more rate hikes
- The ECB opted for a ‘jumbo’ 75 bps rate hike (moving the main refinancing rate to 1.25% and the deposit rate to 0.75%). President Lagarde indicated that further rate hikes are on the cards in the battle against inflation with the magnitude of future rate hikes dependant on incoming data.
- US Fed Chair Powell reiterated his pledge to stay on course with the central bank’s aggressive hiking plan to tame inflation. As such, a 75 bps rise has been almost fully priced in by markets. CPI inflation data (see the week ahead below) will likely be key for the Fed as it decides between a 50 bps and 75 bps rate rise. A 75 bps hike could be symbolic and may mean smaller increases thereafter, in line with our expectations.
Economy – US economic resilience, China under pressure
- The US ISM services index rose and surprised to the upside in August (to 56.9) highlighting the resilience of the US economy (earlier, the ISM manufacturing index also rose and beat expectations in August). The prices paid component of the ISM services survey decreased for a fourth month to the lowest level since January 2021, adding further evidence that US inflation has peaked. Meanwhile, jobless claims fell to a three-month low.
- News flow in Europe was dominated by governments aiming at curbing the impact of soaring energy costs. EU energy ministers have yet to find common ground. Individual nations (eg Germany) have already laid out plans, but more is likely to come. Such packages will likely put the health of government budgets to the forefront of investors’ minds (as has been in the UK, see above).
- China data weakened. Amid renewed local Covid lockdowns and disruptions, in addition to extreme weather conditions, the Caixin Services purchasing managers index fell to 55.0 in August from July’s 15-month high of 55.5. The trade surplus unexpectedly dropped to a three-month low for similar reasons, in addition to being impacted by slowing foreign demand as growth slows. FX reserves fell (to USD 3.06trn) as the People’s Bank of China intervened in markets attempting to cushion the fall of the yuan.
The week ahead
- All eyes on US headline inflation (Tuesday) for August, which is expected to fall to 8.1% (from 8.5% in July). However, core inflation could inch higher to 6.0%.
- The Bank of England has delayed by one week the meeting that was supposed to take place on Thursday due to royal mourning. A 50 bps rate hike to 2.25% seems likely, although 75 bps remains possible given that UK headline inflation (Wednesday) could reach 10.4%.
- Growth concerns in the euro area are likely to be reflected in Tuesday’s ZEW surveys from Germany.
- Industrial output, retail sales and the unemployment rate in China (Friday) will be scrutinized as fiscal and monetary policy stimulus may not be enough to limit the impact of local Covid lockdowns and extreme weather conditions.
Tactical asset allocation
- We recently reduced our equities exposure to neutral – in other words to its long-term strategic position – to reflect the uncertainty around the outlook for equity markets and more favourable bond yields. The more cautious stance is in our view warranted at a time where we see macro currents as so fast moving.
- In such a highly uncertain environment, we continue to focus on exploiting opportunities selectively within asset classes ahead of a clear trend emerging. Over the last month, despite markets being volatile, our high conviction trades have all performed positively. In particular, our decision to carry lower exposure to both Eurozone equities and government bonds has contributed positively.
- We continue to lean towards US equities and emerging market (EM) equities over eurozone equities. Elsewhere, we remain overweight EM sovereign bonds (USD-denominated) vs developed market (UK and EU) government bonds given the attractive yields of EM sovereign bonds, which we think will compensate the additional risks.
Investment strategy
- Following a challenging first half of the year, our investment strategy is so far seeing stronger returns in the third quarter.
- The performance of the key pillars of our long-term investment strategy have been more positive over the last few months. Our global approach to asset allocation, increased exposure to sustainable investments and bias to quality growth in our investment vehicles have all been supportive.
- In short, we believe our core strategy is well positioned for the prevailing uncertain backdrop. Please refer to our September Monthly Counterpoint where we expand on our current thinking.
Market Performance
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Information correct as at 12 September 2022.
Past performance is not a reliable indicator of future returns
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