April has been another tough month for investors as markets gave up the rebound in March and renewed its downturn. Equities returned -6.1% and fixed income markets were also down 2.7%. After reporting negative returns for both asset classes in the first quarter, the trend has continued in April. Today, the dreaded R-words that have hurt market sentiment are rates, Russia, and recession. In this latest portfolio update, we explain why investors are concerned, how you should manage your investments, and how our portfolios offer a fourth R-word amid uncertainty: resilience.
- In May, the Fed raised interest rates by 0.5% — the most in 22 years — to bring its latest target range to 0.75%-1%, from 0.25%-0.50% in March. The central bank of the world’s largest economy is expected to raise rates at all 5 of the remaining Fed meetings in 2022 to curb inflation. But raising rates impacts growth. The Fed’s focus on stabilising prices raises fears of a recession, just 2 years after the last Covid-driven contraction.
- A recession is defined by two straight quarters of economic contraction, and fears of stagflation are mounting. Recessions come in various forms and the market responds in starkly different ways — it can fall before, during or sometimes after the recession. The average fall in equity markets from peak to trough is close to 30% in the last 13 recessions, and the range is wide.
- Financial markets are clearly questioning whether the Fed can deliver a “soft landing” by cooling red-hot inflation without damaging growth. Economists polled by WSJ in April placed the odds of the US economy being in recession in the next 12 months at 28%. This is up from 18% in Jan, and 13% a year ago. Expectations continue to rise.
- The surge in wages in the US also prompts concerns over a wage-price spiral. With rising input costs, if businesses cannot extract greater productivity, they tack on these costs to goods and services, making them more expensive. The risk is that prices viciously spiral upwards. The Fed is trying to tackle inflationary expectations before it becomes sticky.
- The Russia-Ukraine war continues to push up prices of essential items such as oil, food, and metals. China’s zero-Covid policy prolongs supply-chain disruptions too. Latest quarterly earnings of large US retailers show they are absorbing higher costs across the board for now, which hurts their margins.
- Weak quarterly earnings from some Big Tech names such as Netflix and Amazon have hurt market sentiment further. As rates rise, growth stocks turn less attractive as projected cash flows from their businesses will be worth less than before. Valuations are thus being adjusted to more sustainable and reasonable levels.
Resilience amid a downturn
- Amid this, the key portfolios constructed by Endowus remain resilient because they are well-diversified in terms of sector, geographical and factor exposures. Each portfolio holds thousands of individual securities, helping to mitigate the idiosyncratic risks associated with investing in individual stocks.
- In this downturn, take heart: building wealth through investing in markets is a matter of time and discipline. Data shows that investors who stay in the markets stand a much better chance of positive gains. We only have to look back at the Covid-induced market collapse in March 2020. Then, panicked trading resulted in bad outcomes and those who stayed invested or maintained discipline in their monthly plans had much better outcomes.
- The S&P 500 index was started nearly 100 years ago. Tracking its performance shows that time and time again, investors who try to skip the worst days by exiting the market amid a downturn risk selling at a low, and being too late to capture the biggest bounce. The best performing days often follow the worst performing days and the optimal way to scoop up the strongest gains in that same period is to stay invested. Even buying into the S&P 500 even at the peaks — i.e., the worst possible days — over 20 years through to Dec 31, 2018 would have returned 6.9% annually, reports show.
- Of the 24 market corrections (Nov 1974 - mid-February 2020), just five became bear markets (when markets fell by at least 20% from a recent high). The average bear market stretches about 15 months; the average bull-market run goes for 68 months. American economist Paul Samuelson famously quipped that the market has correctly predicted 9 of the last 5 recessions.
- While we cannot predict whether markets will be in a bear market or whether the economy will record a recession, staying invested amid a downturn can let time do the work for you.
Endowus Flagship Portfolios
Endowus Flagship 100% Equity Portfolio held up well against the broader market
This Flagship Portfolio leans slightly in favour of the value investing style and offers an overweight to smaller cap stocks relative to the broad equity market index (MSCI ACWI). Its value tilt pushed the portfolio to an outperformance of more than 1% over its benchmark in April.
As growth stocks continue to be sold off, as exacerbated by disappointing Q1 results from some of the Big Tech names, investors have turned to value stocks that typically have been more resilient amid rising inflation.
Despite the recent correction in growth stocks, the valuation spreads between value and growth stocks remain wide. In an inflationary environment, value stocks have traditionally performed better than growth stocks. We would expect the Flagship Portfolio to still outperform if this continues to hold true.
Endowus Flagship 100% Fixed Income Portfolio proved resilient
Fixed income portfolios performed better than equities and provided some resilience to portfolios in a falling market environment as a source of diversification. But it was another month of negative returns for both assets.
This portfolio has been more disproportionately impacted by the performance of emerging market (EM) bonds. The slight overweight in EM bonds, amid continued volatility in the fixed income markets, led the 100% Fixed Income Portfolio to underperform the Bloomberg Global Aggregate Index.
The Bloomberg Global Aggregate Index allocates more than half of its holdings into investment grade securities issued by global governments and agencies. By comparison, the portfolio holds more than half of its assets in corporate credit and other instruments, with the rest in government securities.
Endowus ESG Portfolios
Endowus ESG 100% Equity Portfolio performed in line with the broader equity market
The portfolio’s performance in April was in line with the broader equity market index (MSCI ACWI). As ESG investing opportunities typically come from fast-growing companies, the ESG 100% Equity Portfolio leans towards the growth style.
It has been surprisingly resilient compared with other growth sectors. In fact, it has outperformed the MSCI ACWI Growth Index, highlighting the value of our asset allocation and fund selection approaches. That said, it underperformed the Endowus Flagship Portfolio due to its growth bias.
The portfolio dodged weaker performance with its underweight to the worst-performing communication services sector — which in turn reflected the weak performance from info-communications names such as Facebook, Alphabet, and Netflix. The portfolio’s sustainability focus also means it would not capture gains in the energy sector, which benefits from rising oil prices.
Endowus ESG 100% Fixed Income Portfolio outperformed the benchmark
Despite its higher allocation to corporate and EM bonds, the core ESG Fixed Income Portfolio delivered resilient performance, tracking the Bloomberg Global Aggregate Index closely in April and year-to-date. The portfolio benefited from its shorter duration positioning when compared against the benchmark; exposure to green bonds added a nudge to performance.
Endowus Income Portfolios
All 3 Endowus Income Portfolios held up well against market indices
- The Stable Income Portfolio tracked the benchmark in April, with the portfolio’s shorter duration supporting performance.
- Higher Income Portfolio’s overweight in real estate and infrastructure sectors provided a buffer against a larger exposure to high-yield and corporate bonds.
- The Future Income Portfolio held up despite its higher equity allocation. This reflects the mix of high quality and lower duration exposure in fixed income, and the allocation to European equities and dividend-oriented equities.
- All 3 portfolios are still delivering at the higher end of the income payout range
Actual payout remains the same despite the negative returns across the portfolios. Negative returns do not affect actual coupon payments or dividend payout from the underlying funds. The yield to maturity of most of the underlying bond holdings and the latest dividend yield of the equity holdings have risen since inception of the portfolio.
Higher interest rates cause short-term dislocation in an investor’s fixed income portfolio. But in the long term, a higher interest rate environment means investors can have their proceeds reinvested in higher yielding instruments. This sets the stage for higher income generation for investors seeking a more robust income payout.
Endowus Cash Smart Portfolios
Cash Smart Secure held up well again; Enhanced, Ultra stayed in negative territory
- The sharp falls in fixed income markets spilling over to short duration bonds has been a continuing theme. The safer Secure Portfolio, without bond exposure, has continued to generate good positive yield, while Enhanced and Ultra Portfolios are showing negative returns due to rising interest rates.
- The Secure Portfolio has done better than the reference interest rate for interbank lending in Singapore, SIBOR (Singapore Interbank Offered Rate), on a comparative 3-month and 6-month basis. Its mix of institutional cash deposit and ultra-short duration money market funds has made it more resilient than other fixed income securities.
- With losses in the fixed income markets extending into April, the Enhanced and Ultra Portfolios recorded negative returns. The drags came mainly from exposure to US Treasury bills and Asian fixed income markets.
Fund managers of the underlying funds have shortened overall duration in the funds, decreasing sensitivity to interest rate movements. A shorter duration portfolio typically is more resilient in periods of high volatility.
Despite the negative returns, rising interest rates offer one silver lining. As central banks around the world raise interest rates, the underlying funds are able to reinvest the coupon payments and cash returned from any maturing bonds into higher yielding bonds. This is reflected in the increased projected yields. If interest rates peak, the headwinds of performance are set to dissipate for the Enhanced and Ultra Portfolios.
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