Endowus Portfolios Performance Update (April 2024) Has the dragon re-awakened?

The rebound

Chinese equities have rebounded, reversing the first-quarter downturn with a 6.5% gain in the MSCI China Index (in local currency terms) in April, outperforming most other major markets. 

This recovery was fueled by several positive developments, particularly in the real estate sector. For one, a major developer reached an agreement to restructure its overseas debt and also, the Chinese authorities updated their policies to ease home purchase restrictions and lower mortgage rates. Although no single announcement can completely shift market sentiment, this collection of favourable news has significantly bolstered investor confidence.

Adding to the positive sentiment, Chinese government entities have been actively purchasing mainland stocks to stabilise the domestic market, while global investors are starting to return to Chinese equities after a period of selldown amid geopolitical and policy concerns. China’s State Council pledged to improve capital markets, through controlling IPO supply, encouraging dividend payouts, and enhancing corporate governance.

The confluence of government actions, shifting global investment flows, and policy support is creating a conducive environment for the recovery and growth of Chinese equities. However, investors remain divided as to whether this rebound of the Chinese stock market will be short-lived.

Split sentiment

Optimists highlight an improving earnings outlook for Chinese companies, noting April as the first month of earnings-per-share estimate upgrades for CSI 300 constituents in seven months, alongside technical indicators which suggests that the market may have already bottomed out.

Conversely, pessimists focus on economic indicators, arguing the rally might lack sustainability. Concerns over deflation also loom, suggesting that China's economic downturn could lead domestic investors to expect a Yuan devaluation.

Despite China's GDP growth in the first quarter of 2024 exceeding expectations, new economic data prints, including weakened retail sales and production growth, indicate persistent economic challenges.

Chinese stocks are underrepresented in global portfolios

No matter which camp you might belong to, one thing is certain - China is too big to ignore. Accounting for approximately 19% of global GDP, it has firmly established itself as a major player on the world stage. Since surpassing Japan as the world’s second-largest economy in 2010, China has been on a growth trajectory until recently.

Even with its status as the second largest economy, China remains underrepresented in major global equity indices. There are possibly several reasons for this:

Market accessibility – Historically, China's financial markets have been relatively closed to foreign investors. Restrictions on foreign ownership, capital controls, and the Qualified Foreign Institutional Investor (QFII) system have limited the ease to which international investors can enter the market. Although reforms such as the Stock Connect programs have improved access, challenges still remain.

Regulatory concerns - International investors often cite regulatory transparency and governance issues as barriers. The Chinese market is perceived to have less regulatory oversight compared to Western markets, which can deter inclusion in global indexes that prioritise governance standards.

Capital controls - China maintains certain capital controls that can restrict the free flow of capital in and out of the country. These controls pose a risk for global investors who need the flexibility of being able to repatriate funds as needed.

The Chinese equities alphabet soup

Adding to this complexity are the different types of shares that make up the Chinese stock market.

Looking at the different indices representing the different share types, there is a large dispersion between the different types of shares.

The best-performing index in April was the Hang Seng China Affiliated Index, which represents Red-chips, those known as state-controlled companies incorporated outside of the country, and listed in Hong Kong. The NASDAQ Golden Dragon China Index, which tracks the US-listed Chinese companies, performed the worst, in April, among the Chinese equity indices. Though, in May, it has been so far the strongest performer as of 13 May, 2024.

Narratives of single-country indices

The key takeaway from the chart is not only to compare Chinese equity indices with global stock market performances, but also to highlight the significant variation in performance, even within China itself.

If you see the recent upturn in China's equity market as the beginning of a broader, lasting recovery, you might consider investing in one of the many diversified China equity funds on the Endowus Fund Smart platform. These funds cover various market segments, including A shares, H shares, P-chips, Red-chips, and N shares.

Conversely, if you have reservations about the sustainability of the Chinese market rally, maintaining a globally diversified equity portfolio that includes investments in China as part of a broader strategy may be the most prudent approach. Endowus advocates for a disciplined, evidence-based approach to investing, which involves diversifying across a wide range of assets to reduce risk and enhance the odds of investing success. This is particularly pertinent when considering the inclusion of Chinese equities in a portfolio.

If you hold a completely different view of the Chinese market rally, then the best way to express this view is to continue holding a globally diversified equity portfolio that invests in China as part of a greater portfolio.

April market commentary

The US stock market experienced a sharp decline in April, erasing the gains accumulated since the beginning of the year. Initially buoyed by expectations of interest rate cuts by major central banks, including the US Federal Reserve, and hopes for a soft landing of the US economy, investor sentiment soured following economic data that suggested a slowdown in the US economy amid persistent inflationary pressures. This raised concerns that the Federal Reserve might keep interest rates high for longer, leading to a 4% drop in the S&P 500 Index.

Europe also saw a lacklustre performance, with the MSCI Europe Index falling by 1.9% in USD terms. Despite diminishing prospects for U.S. rate cuts, recent data hint at a possible rate cut by the European Central Bank in June, as eurozone inflation remained steady at 2.4% in April, according to Eurostat.

Emerging markets slightly outperformed developed markets, with the MSCI EM Index gaining about 0.5%, compared to a 3.7% decline in the MSCI World Index. This was helped by strong performances in India (2.3%), Turkey (14%), and China (6.6%), in USD terms. Conversely, Japan continued to disappoint in the developed markets, with the MSCI Japan Index dropping by about 4.9% in USD terms and 1.1% in local currency.

In terms of factors, small caps underperformed large caps in most regions, except in emerging markets where EM small caps outperformed large caps by approximately 1.5%. In a shift, growth stocks lagged behind value stocks in developed markets, with the value premium being almost negligible in the US and EM.

In fixed income, April saw a global sell-off in government bonds, led by the US, pushing the 10-year yield to 4.7% as markets adjusted to expectations of persistently high interest rates. However, credit markets fared better, with high yield bonds outperforming investment grade bonds.

Key performance highlights for the Endowus Portfolios in April

• The Flagship 100% Equity Portfolio performed in line with the broader global equity markets in April. The portfolio’s value bias and its slight overweight in emerging markets contributed to relative performance against the benchmark, but this positive impact was negated by the underperformance in small caps. 
• The fixed income sleeves of the Income Portfolios outperformed the benchmark, benefiting from its shorter duration stance, and strategic allocation to the high-yield sector. The portfolio's equity segment’s tilt towards real assets was one of the reasons for its slight relative underperformance against the broader equity market in April. 
• All three Cash Smart solutions continued to generate positive returns in April.

Endowus Core-Flagship Cash/SRS Portfolio

‍The 100% Equity Portfolio performed in line with the broader global equity markets in April

• The global equity market — represented by the MSCI All Country World Index (ACWI) — was in negative territory in April, led by the decline in the US market. The Equity Portfolio’s value bias and its slight overweight in emerging markets provided a tailwind for relative performance against the benchmark but this positive impact was negated by the underperformance in small caps. In April, the strongest performer in the equity portfolio was the Dimensional Emerging Markets Large Cap Core Equity fund.

The 100% Fixed Income Portfolio outpaced the broader global fixed income markets by 0.2% during the month

• The global fixed income markets — as represented by the Bloomberg Global Aggregate Index — posted negative returns as yields increased and bond prices fell. 
• A couple PIMCO funds contributed to relative performance as they outpaced the Bloomberg Global Aggregate Index in various degrees. The PIMCO Global Bond and the PIMCO Income fund were the major contributors, while the Dimensional Global Core Fixed Income fund detracted by a slight margin.

Endowus Core-Flagship CPF Portfolio

‍The 100% Equity Portfolio outstripped its benchmark by 0.7% in the month of April

• The Portfolio’s structural overweight to emerging markets proved beneficial in April as emerging markets outperformed developed markets. The best performing funds in the equity line-up were the FSSA Dividend Advantage and the Schroder Global Emerging Opportunities funds.

‍The 100% Fixed Income Portfolio beat its benchmark by a slight margin in April

• The global fixed income markets — as represented by the Bloomberg Global Aggregate Index — posted negative returns as yields increased and bond prices fell. 
• The only fixed income fund that did not decline during the month was the United SGD Fund. Its shorter duration positioning with respect to the benchmark helped as longer duration bonds, with their higher sensitivity to interest rate movements, declined more. The Eastspring Singapore Select Bond also contributed to relative performance as it outperformed the Bloomberg Global Aggregate Index.
  

Endowus Income Portfolios

The Stable Income Portfolio demonstrated resilient performance in April, outperforming its benchmark by 0.5 percentage points.

• The portfolio's shorter duration, compared to the benchmark, contributed to its relative performance, as the inflation uptick and delay in Fed easing weighed on long duration assets. 
• Funds with shorter duration positioning, such as the JPM Income Fund and the Neuberger Berman Short Duration Emerging Markets Fund contributed the most to the portfolio’s outperformance. The outperformance was partially offset by the negative impact from funds with longer duration positioning. 

The Higher Income Portfolio outperformed slightly the 20-80 benchmark in April

• The portfolio's fixed income segment did well, benefiting from its shorter duration stance, and strategic allocation to the high-yield sector.
• The portfolio's equity segment’s tilt towards real assets was one of the reasons for its slight relative underperformance against the broader equity market in April. 

The Future Income Portfolio outperformed the 40-60 benchmark in April

• The portfolio's fixed income component outperformed due to its shorter duration positioning.
• The portfolio’s equity component delivered relative outperformance against the broader equity market. The relative outperformance was primarily due to its strategic allocation to Asian equity through the FSSA Dividend Advantage Fund, which rallied 3.4% in April. 

All three Income Portfolios are achieving their payout targets 

• Actual payouts have remained stable despite the fluctuation of prices across the three portfolios. Volatility in price returns will result in mark-to-market changes (decrease or increase) in the portfolio value, but will not impact the actual coupon payments or dividend payouts from the underlying funds. 
• Yields in the fixed income market have risen meaningfully following the increase in global interest rates, creating a higher yield environment for income-seeking investors. 
• The changing interest rate environment has resulted in a divergence between the respective payout yields of Stable Income and Higher Income. This divergence is a reflection of the enhanced ability of investment grade flexible income funds to generate income in the current environment of elevated interest rates, compared to high yield and equity funds. These dynamics were pivotal in the Recommended Portfolio Change in November 2023, where we improved the credit quality of all three portfolios while maintaining the target payout levels. As we continue to monitor these evolving market conditions, it's crucial to acknowledge that the Higher Income Portfolio is strategically crafted to yield a higher total return than the Stable Income Portfolio over the long term.

Endowus Cash Smart Portfolios

‍Cash Smart Secure continued to generate stable and positive returns

• The Secure portfolio maintained its objective of providing stable and attractive returns, notching a 0.33% gain in April 2024. 
• This performance could be attributed to the positive returns from both the underlying funds, Fullerton SGD Cash and LionGlobal SGD Enhanced Liquidity; each contributed around 0.3%. 
• Over the past year, we have observed a consistent pattern in monthly returns, hinting that yields might have reached their peak.
• Nevertheless, in light of the "higher for longer" stance from the US Federal Reserve, SGD interest rates have also been observed to remain elevated for an extended period.

Cash Smart Enhanced experienced steady growth

• Cash Smart Enhanced saw a slight decrease in its monthly returns, returning 0.16% in April.
• This pullback primarily resulted from the volatility in the broader fixed income market which had reacted to the anticipation of a "higher-for-longer" interest rate environment.

Cash Smart Ultra achieved positive returns in April

• Cash Smart Ultra posted a modest return of 0.07% in April.
• The main factor behind this performance was the PIMCO Low Duration Income Fund, which, after delivering an attractive 1.1% return in March, experienced a slight decline in April, like the rest of the fixed income market.

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