The recent rate increases in the US and UK will assist in lowering inflation expectations, according to Jarred Sullivan at Ashburton Investments, where the firm remains cautious on global equity returns.
In the investment management firm’s commentaries on the markets, Jarred says that they remain cautious on global equity returns as the supportive monetary and fiscal policy that helped propel equities last year continues to fade. They are relatively defensively positioned when compared to 2021 holdings.
Jarred Sullivan (pictured), Global Multi-Asset Investment Strategist, adds that “higher rate increases, along with a reversal of quantitative easing in the US, are tightening financial conditions, lifting the cost of borrowing and effectively play a role in tempering aggregate demand to levels that are more in line with aggregate supply. This will assist in lowering inflation expectations.”
Summary
- Global equity markets endured another volatile month, although the FTSE All-World Total Return USD Index just eked into positive territory, registering an increase of 0.2% in May.
- The release of the FOMC minutes revealed that the Committee expressed interest in selling agency MBS, so that asset holdings consist primarily of treasuries.
- EU leaders plan to cut more than two-thirds of Russian energy imports exacerbating supply concerns. Additionally, the banning of wheat exports in India and poor crop conditions in the US have fuelled concerns over unsustainably higher staple prices.
- The greater than anticipated cut in the 5-year loan prime rate to 4.45% from 4.6% signals a firmer intent from the PBOC to lower the cost of borrowing and stimulate credit demand going forward.
Market update
“Global equity markets endured another volatile month, although the FTSE All-World Total Return USD Index just eked into positive territory registering an increase of 0.2% in May. This brings the year-to-date drawdown to 12.4%. Similarly, the FTSE World Broad Investment-Grade Bond Index climbed 0.3%, although still down 11.6% this year. The marginal decline in bond yields over the month can likely be ascribed to an easing of the structural outlook in inflation as the US 10-year break-even inflation rate fell notably over the month. A deteriorating growth outlook suggests that demand-pull inflation will likely abate, although supply-side pressures remain.
The release of the FOMC minutes reaffirmed that Federal Reserve members preferred to hike the federal funds rate by increments of 50 basis points in the up-and-coming Committee meetings. Additionally, it was noted that once the balance sheet runoff process commences, the Committee expressed interest in selling agency MBS so that asset holdings consist primarily of treasuries. It was stated that any such action, however, will likely be communicated well in advance. Commentary from other central banks such as the ECB have also become more hawkish to stem inflationary pressures.
Inflation remains at the forefront of investors’ asset allocation process, as US CPI showed the first signs of deceleration this year slowing to 8.3% year-on-year in April from 8.5% the previous month. Nevertheless, the level of inflation is elevated and will likely remain the status quo in the coming months as food and energy prices persist on an upward trend. Tensions between Russia and Ukraine continue to drive the supply-side shock to the global inflation basket.
Additionally, EU leaders plan to cut more than two-thirds of Russian energy imports exacerbating supply concerns. More recently, the banning of wheat exports in India and poor crop conditions in the US have fuelled concerns over unsustainably higher staple prices.
Global data remains lacklustre, particularly as consumer confidence continues to trundle at depressed levels in the developed market. While data releases from China have been dismal, there are signs of improvement as the economy begins re-opening. The greater-than-anticipated cut in the 5-year loan prime rate to 4.45% from 4.6% signals a firmer intent from the PBOC to lower the cost of borrowing and stimulate credit demand going forward.
Covid-19 cases continue to abate as the global vaccination rollout continues to make significant headway. According to Our World in Data, 60.1% of the world’s population was fully vaccinated as of 31 May 2022, compared to 59.2% in the previous month.
Fund strategy
We remain cautious about the returns for global equity markets as the supportive monetary and fiscal policy that helped propel equities last year continues to fade. Developed market consumption expenditure is expected to be more muted amid lower savings rates, subsiding government transfer payments, and as real disposable income is eroded by inflationary pressures. Accordingly, we continue to hold positions in defensive sectors such as consumer staples, healthcare, and utilities.
While the level of CPI will likely remain elevated, we continue to believe that it will decelerate on a rate of change basis in 2H22 as we assume supply chain bottlenecks will likely unwind and as demand-pull inflation eases. In addition, shelter price base effects from 2021 will likely lead to a disinflationary backdrop, likely only toward the end of the year, as a more meaningful acceleration seems unlikely due to rising affordability concerns likely limiting house and rental price appreciation.
Fund performance
The USD Global Growth and Balanced Funds fell 1.5% and 1.2% respectively, slightly lower than their Morningstar peer groups of a decline of 0.7% and 0.6% for each respective fund. A weaker dollar over the month combined with a slowdown in the consumer staples sector and a lower gold price detracted from performance. Nevertheless, both funds remain in the first quartile on a one-year basis.
Our most defensive fund, the Sterling Asset Management Fund, contracted 1.4%, largely due to its high fixed income structure. We continue to remain vigilant by keeping the overall fund beta at lower levels compared to the majority of last year amid a highly volatile and uncertain economic environment.”
[1] All performance metrics are stated in I Class terms.
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