Endowus Portfolios Performance Update (May 2024) — Ballots, bulls and bears: India’s recent election

The shocking results

India closed its general election on 4th June. Despite predictions of a landslide victory, Narendra Modi's Bharatiya Janata Party (BJP) lost its parliamentary majority, forcing Modi to govern through a coalition. This outcome disrupts Modi's agenda and introduces political complexities that have unsettled financial markets, yet it also promises a brighter future by reducing the risk of autocracy and reinforcing democratic principles.

The BJP aimed for a sweeping victory but secured only 240 seats, losing ground to regional parties and reflecting concerns about unemployment and caste-based politics. Modi's coalition partners, once optional, are now essential for his continued leadership, complicating the political landscape.

The election outcomes underpins a national desire for development over divisive identity politics, highlighting the need for consensus-driven reforms in agriculture, education, and energy policy.

Market sentiment

Immediately after the election, investor scepticism over the weaker-than-expected mandate led major Indian equity indices to dip. The Nifty 50 dropped nearly 6%, and the MSCI India declined over 6%, driven by heavy foreign outflows. However, domestic institutional investors' enthusiasm led to a rebound of more than 3% the next day.

With Modi now needing to govern through a coalition, concerns about sustaining reforms and avoiding populist measures have surfaced. Policy continuity is crucial for global investors, making the upcoming budget the new government's first major test.

What next, for India?

During Modi’s decade in power, India’s equity market has grown over 250%, nearing US$5 trillion in value. With high valuations, the market is one of the most expensive globally, leaving little room for disappointment.

A key risk, investors are thinking about, is a potential slowdown in policy-making under a coalition government, as Modi may need to make concessions to maintain support. Some investors see the weakness in Indian stocks as a buying opportunity, given the country's promising economy driven by a rising middle class and strong demographics.

Historically, Indian stocks have performed well under coalition governments. Despite concerns, many believe the BJP's pro-growth, investor-friendly agenda will continue, supported by India's structural growth drivers. 

Historically, Indian stocks have performed well under coalition governments. For example, the MSCI India Index surged over 180% between 2004 and 2014 when a Congress-led alliance ruled the nation. Coalition governments can bring a broader consensus on key economic reforms, which may provide long-term stability.

A coalition government often requires negotiation and compromise, which can prevent the implementation of extreme or populist policies that could disrupt markets. This can ensure a more balanced and moderate approach to policy-making. However, coalition governments can also face difficulties in passing significant reforms due to the need to satisfy multiple parties. This can lead to policy gridlock, slowing down the pace of economic reforms and infrastructure projects, which can be detrimental to market sentiment.

A study of the Nifty 50 index under previous governments shows that market returns are largely unaffected by the ruling party. Instead, a confluence of factors, both domestic and international, is likely to have a much larger influence.

Market commentary (May 2024)

The S&P 500 rebounded sharply in mid-May, posting a return of about 5% and recovering from its worst month since September 2023 to reach new record highs. Inflation for April came in at 3.4%, a slight decline from the 3.5% figure in March. This was the first time this year inflation had cooled, albeit marginally. Job market data for April revealed a deceleration in job creation, indicating that the U.S. economy is not undergoing a new phase of growth. Despite global inflation data proving more persistent than anticipated towards the month's end, investor sentiment improved, with market participants remaining optimistic about potential cuts later this year.

The market rally remained narrowly focused, driven in part by stellar earnings from chipmaker Nvidia, which contributed to a 9% surge for the Magnificent Seven stocks. Additionally, the resurgence of 'meme stock' fervour, reminiscent of the 2021 frenzy, was notable. This wave was triggered by the reactivation of a social media account linked to a key figure from that period, leading to significant retail investor interest and substantial gains for stocks like GameStop and AMC.

In the eurozone, the European Central Bank (ECB) has expressed increased confidence in the economy’s disinflationary trajectory, with wage growth continuing to moderate despite a recovery in economic activity. In May, both headline and core inflation accelerated to 2.6% and 2.9% year-over-year, respectively. Despite this unexpected rise, the recent trend of slowing inflation has enabled the ECB's governing council to signal a high degree of confidence that rate cuts will occur in June, although the future path remains uncertain.

In the UK, headline inflation significantly fell to 2.3% year-over-year in April. However, services inflation remains high at 5.9%, making any hopes of a June rate cut from the Bank of England appear premature. Meanwhile, the Bank of Japan is facing a contrasting situation, where rate hikes seem necessary to support a weak currency, but excessive tightening could jeopardise the return of reflation.

Global equities resumed their upward trajectory in May after a temporary correction in April. Stoxx 600 reached a new all-time high mid-month, while UK stocks and the Nikkei also rose on positive sentiment.

During the month, developed markets outperformed emerging markets. After a strong start to the year, Hong Kong and Chinese mainland stocks fell back in May, as supportive economic data was partially offset by the prospect of additional U.S. trade tariffs on various industries.

In terms of factors, in a surprising move, small caps outperformed large caps in most regions, except in the US, where US small caps trailed US large caps by a slight margin. US value stocks were, once again, unloved as growth stocks, led by Nvidia, went on a tear, outperforming by more than 3.5%. Elsewhere, outside of the US, value outpaced growth.

In May, government bond markets diverged. U.S. Treasury yields fell from their year-to-date highs, outperforming European markets where yields rose. Positive inflation data, weaker growth signs, and softer labour market indicators supported U.S. bonds, with Fed Chair Jerome Powell suggesting rate hikes were unlikely. Renewed confidence in potential Fed rate cuts bolstered credit markets, with U.S. investment-grade corporates outperforming European counterparts. Both U.S. and European high-yield bonds performed well, driven by a constructive economic backdrop and tightened spreads between financials and non-financials.

The S&P GSCI had a difficult month in May, retracting by 1.9%, in USD terms. The weakest performing sectors were Energy and Crude oil.

Key performance highlights for the Endowus Portfolios in May

• The Flagship 100% Equity Portfolio (after fund fees) performed in line with the broader global equity markets in May. The portfolio’s biases towards value and small caps provided a tailwind for relative performance against the benchmark. However, this positive impact was negated by the portfolio’s structural underweight in the US as the US outperformed the other major equity markets.
• The global fixed income markets — as represented by the Bloomberg Global Aggregate Index — generated positive returns as yields fell across the board. The fixed income sleeves of the Income Portfolios outperformed the broader market. The flexible bond funds mostly contributed to relative performance due to their active management of duration and credit risk. The portfolio’s allocation to Asian bonds also contributed.
• All three Cash Smart solutions continued to generate positive returns in May.

Endowus Core-Flagship Cash/SRS Portfolio

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

• Both the 100% equity portfolio and its benchmark, MSCI ACWI, posted positive returns during the month of May.
• Both the Equity Portfolio’s biases towards value and small caps provided a tailwind for relative performance against the benchmark as value stocks and small caps outperformed against their counterparts in most regions except the US. However, this positive impact was negated by the portfolio’s structural underweight in the US as the US outperformed the other major equity markets.

The 100% Fixed Income Portfolio outperformed 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 — generated positive returns as yields fell across the board.
• Most of the fixed income funds outperformed the benchmark with the exception of the Amundi Global Aggregate Bond Fund. The index fund trailed its benchmark very slightly. The best performing fund in the line-up, during the month, was the PIMCO GIS Income Fund.

Endowus Core-Flagship CPF Portfolio

The 100% Equity Portfolio underperformed its benchmark by 0.4 % in May

• The portfolio’s overweight in emerging markets was a headwind as EM underperformed DM. The weakest performers in the equity line-up were the FSSA Dividend Advantage and the Schroder Global Emerging Opportunities funds.

The 100% Fixed Income Portfolio outstripped its benchmark by a slight margin in May

• The global fixed income markets — as represented by the Bloomberg Global Aggregate Index —were in positive territory as yields fell across the board.
• The primary contributor to the relative outperformance was the Eastspring Singapore Select Bond. This positive impact was negated by the weaker performance of the United SGD fund and the Franklin Templeton WA Global Bond fund. Aside from the Amundi Global Aggregate Bond fund, those two funds in the fixed income sleeve underperformed the benchmark.
  

Endowus Income Portfolios

The Stable Income Portfolio outperformed its benchmark by 0.3 percentage points in May

• The portfolio’s allocation to most flexible bond funds, as well as to Asian bonds, contributed to the relative performance. 
• Notably, the portfolio’s outperformance speaks to the value added by the active management of the flexible bond managers as they continue to take advantage of the rate volatility and the divergence between different economies and sectors to generate excess return. 

The Higher Income Portfolio delivered positive results, although slightly underperforming the 20-80 benchmark in May

• The portfolio’s fixed income component outperformed the broader market. The flexible bond funds mostly contributed to relative performance due to their active management of duration and credit risk, as well as its allocation to Asian bonds.
• The portfolio’s equity component lagged the broader equity market. Allocation to emerging markets and Asian equities detracted from relative performance. The portfolio’s tilt towards value also detracted from relative performance as growth stocks continued to lead in May, particularly in the US. 

The Future Income Portfolio outpaced the 40-60 benchmark in May

• The portfolio’s fixed income component outperformed due to reasons similar to the Stable Income portfolio. 
• The portfolio’s equity component underperformed the broader equity market, with the biggest negative impact coming from its allocation to Asian equities. 

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 stable return profile, posting a 0.30% gain in May 2024. 
• This performance could be attributed to the continued positive returns from both the underlying funds, Fullerton SGD Cash and LionGlobal SGD Enhanced Liquidity; each contributing around 0.3%. 
• Over the past year, we have observed a consistent pattern in monthly returns, in a possible indication 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 was buoyed by a favourable market environment

• Cash Smart Enhanced generated a return of 0.34% in May.
• United SGD Fund’s exposure to Asian credit, which benefited from the broad fixed income market pick-up during the month, contributed to the portfolio’s return.

Cash Smart Ultra had a rebound in May

• Cash Smart Ultra achieved a return of 0.47% in May.
• The main driver behind this rebound was the PIMCO Low Duration Income Fund which delivered a strong return of 1.39%, buoyed by a favourable fixed income market environment.

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