Glass half empty or half full?

The market is in two minds about the state of the US economy after its 0.9% contraction (0.2% after adjusting for inflation) in the second quarter. This decline in gross domestic product (GDP) follows a 1.6% fall (or an inflation-adjusted 0.4%) in the first quarter. For some, two consecutive quarters of negative growth means that the US economy is now in a technical recession. Others disagree, pointing to a robust July job report, the healthy level of household savings, and continued wage growth.

The Fed announced another 75 basis point (bps) rate hike in late July as inflation remained elevated, pressured by continued supply and demand imbalances. While core PCE (personal consumption expenditures) inflation — the preferred measure of inflation by the Fed — seems to have peaked, it is still above the Fed’s target of 2%.

Amid recession fears, markets perk up

As fears of a recession mount and Google searches of the word “recession” grow, global equities rallied, led by the US market. The S&P 500 index posted a monthly return of 9.2%. Global growth stocks also roared back to life, outperforming value stocks by a wide margin.

In the fixed-income markets, bond yields in July largely declined across the board as evidence of an economic slowdown strengthened, particularly in the US. In a reversal from the previous months, corporate bonds outpaced government bonds. High yield bonds also enjoyed a revival in July.

To find out more about the latest rally in US technology stocks and whether it will last, click here.

Key performance highlights for the Endowus Portfolios in July

• Endowus key portfolios generated positive returns in July, with the fixed income component of the Core Flagship Portfolio outperforming the broader fixed income market. The equity Core Flagship Portfolio performed in line with the broader global equity market.
• The Core ESG Portfolios maintained their meaningful growth tilt, contributing significantly to outperformance in July. Fixed income in these portfolios also outperformed the benchmark.
• All three Income Portfolios generated positive returns in July. Most importantly, the payouts remained consistent and, with rising interest rates, yields continue to move higher.
• The Cash Smart Secure and Enhanced solutions posted positive absolute returns in July, with Secure consistently delivering a similar positive return on a monthly basis. As with the Income Portfolios, projected yields for the Cash Smart solutions have continued to increase with the rise in interest rates.

Endowus Flagship Portfolios

Endowus Flagship 100% Equity Portfolio performed in line with the global equity market

• In a reversal from the previous months, the portfolio’s slight value tilt proved to be a detractor from relative performance as growth stocks were back in favour at the expense of value stocks.
• Still, even with the value tilt, the portfolio largely performed in line with the broad market. Its year-to-date outperformance versus the MSCI All Country World Index (ACWI) remained intact.

Endowus Flagship 100% Fixed Income Portfolio outperformed the global fixed income market

• Yields declined in July, resulting in positive returns for the broader fixed income market.
• The portfolio’s relative overweight in corporate debt had a positive impact as corporate debt performance generally outpaced that of government and sovereign debt in July.

Endowus ESG Portfolios

‍The ESG 100% Equity Portfolio rebounded in July

• As growth stocks regained favour with investors, the portfolio’s performance rebounded with a vengeance, aided by the portfolio’s tilt to growth sectors such as technology. The portfolio outperformed the MSCI ACWI in July with a 8.6% return.
• All three underlying funds posted strong returns, with the best performer being the Mirova Global Sustainable Equity Fund, the largest holding in the portfolio. 

‍The ESG 100% Fixed Income Portfolio outperformed the broader fixed income market

• The portfolio’s higher exposure to corporate debt was a major contributor as bond yields fell across the board. Softening economic data in the US resulted in investors raising their expectations of a recession and a more moderate interest rate hike by the Fed.
• The PIMCO GIS Climate Bond Fund was the best performer of the month as exposure to green bonds and climate leaders in both the investment-grade and high-yield corporate credit segments contributed to its performance.

Endowus Income Portfolios

‍The Stable Income Portfolio generated positive returns in July

• This was primarily aided by its exposure to US duration and high yield through the PIMCO GIS Income Fund and the AB American Income Portfolio. 
• Emerging markets exposure via the Neuberger Berman Short Duration Emerging Market Debt Fund also contributed positively to its total return, but the shorter duration focus was a detractor.

The Higher Income Portfolio rebounded in July as well

• The portfolio’s larger weight to the high-yield market via the Threadneedle US High Yield Fund and the Allianz Global High Yield Fund helped performance, as that segment rebounded in July. The portfolio’s greater allocation to listed real estate and infrastructure also contributed.

The Future Income Portfolio was the best performer among the three Income Portfolios

• Its allocations to US duration and high yield were the primary drivers of performance.
• The allocation to developed-market equities — in particular, the overweight to European equity markets — contributed meaningfully as well.

All three Income portfolios are consistently delivering their respective payout targets 

• Actual payout remains stable despite the negative returns across the portfolios. Negative returns generated by a mark-to-market effect do not impact the actual coupon payments or dividend payout from the underlying funds. 
• As the first chart below shows, the actual payout from each Endowus Income Portfolio — assuming an initial investment of S$100,000 — has been stable and inching up higher month to month. The annualised payout yields for the portfolios have been rising as a function of stable monthly payouts and lower net asset values.

Endowus Cash Smart Portfolios

‍Cash Smart Secure continues to generate positive, stable returns

• Buoyed by increasing yields amid continued hawkish central bank policies, the portfolio last month generated the highest monthly return since its launch in July 2020.
• Both the underlying funds had positive returns in July.

‍Cash Smart Enhanced posted positive returns in July

• The portfolio’s underlying funds generated positive returns last month, with the hefty allocation to corporates aiding returns as corporate bonds outperformed government and sovereign debt.

‍Cash Smart Ultra retracted slightly in July

• The PIMCO GIS Low Duration Income Fund had a healthy rebound last month, aiding the portfolio’s performance. However, the other underlying funds continued to face a difficult environment in July, resulting in a slight negative return for the portfolio.

Cash Smart projected yields have been on an upward trend with the rising market interest rates

• The fall in bond prices has a negative mark-to-market impact, but it results in a higher yield to maturity of the bonds that are in the portfolios.
• The rising rate environment provides an opportunity for the underlying funds to reinvest and allocate the coupon payments and cash from maturing bonds to higher yielding bonds. The underlying fund managers will continue to take advantage of this environment as they reposition their funds for the next few months.