Endowus Portfolios Performance Update (May 2023) — US Economy: From Strength to Strength

Surprise in resilient lift of US economy

Endowus conducted a market outlook survey with more than 50 fund management companies at the beginning of the year, with one of the questions focused on the best opportunities in 2023. More than half responded with emerging markets, China, and Asia as the regions with the best opportunities in 2023. Less than 10% of the respondents picked the US. 

We are now halfway into the year, and 2023 has played out differently from expectations going into the year. The MSCI China Index has retracted about -8.4% while the S&P 500 has increased by 9.7%. Where is the US market drawing its strength from?

In the past few weeks, we’ve seen the fog lift from the US markets as the debt ceiling saga came to a conclusion (for now). The Federal Reserve has signalled that a pause in rate hikes may be coming, on the back of high-profile regional bank failures, to allow the Fed to assess the impact of the rate increases. 

We have seen mixed signals in the US economy with solid numbers in spending and labour market data versus weakness in the survey data. However, the overall hard data of the economy and corporate earnings have been more resilient than previously expected.

The labour market, overall, has been solid, with the May US jobs report continuing to beat expectations as the US labour market added more jobs than previously anticipated. On top of that, the automotive and housing markets — which could have cooled down more quickly in response to rising rates — are showing signs of recovery. Car prices have generally remained high partly due to the supply issues that arose during the pandemic. Housing prices, which came down hard last year, have also started to recover amid lower inventory.

On the other hand, wage growth has slowed down. We are seeing that job growth in goods-producing industries in the US has visibly stalled while the services sectors continued to add jobs. This puts less pressure on the Fed to immediately resume its rate hike after the probable pause in June.

With inflation remaining high and the growth outlook vulnerable, the Fed’s decision will continue to be data-dependent.

Along with the more resilient economic data, another reason the S&P 500 index has been strong this year is the strength of a handful of tech stocks that have seen stellar rallies on the back of the artificial intelligence (AI) euphoria. 

The generative AI application ChatGPT reached the 100 million mark in downloads in just two months, eclipsing the likes of TikTok. Big Tech stocks linked to the AI wave have been snapped up by investors, leading the Nasdaq 100 index to rise about 31% year-to-date. The top seven Big Tech stocks in the S&P 500 index have appreciated about 72% on average in the year-to-date period ended 31 May 2023, while the index itself rose a mere 9.7%.

Positioning your portfolio for the rest of 2023 

As a region, developed market equities have outperformed emerging market equities in the year-to-date period ended 31 May 2023, and China’s recovery has seemingly faltered. But, it is hard to predict whether that would continue to be the case for the rest of the year, given the challenges that the developed markets, especially the US, continue to face. 

Fixed income also continues to see challenges. Many experts chose fixed income as the asset class with the best risk-return profile at the beginning of 2023, and fixed income remains a core and important part of any investor’s portfolio. Investment grade debt has historically been able to protect investors in down markets, while high yield can help meet your income needs with higher-yielding coupons. Without timing the market, investors should look to their goals, risk tolerance level and investment horizon to determine the right mix of asset classes for their portfolio. 

Even experts can get it wrong. That’s what this unusual year has shown. At Endowus, we continue to advocate investing in a globally diversified portfolio precisely for this reason — it is impossible to predict and time the markets, and an investor would most likely be better off investing in the entire global market. Likewise with fixed income, taking into account risk-return preferences and trade-offs, investors should consider investing in a globally diversified fixed-income portfolio with exposure to multiple asset classes, including investment grade, high yield, and emerging-market debt.

May market commentary

The markets in May 2023 were marked by nervousness over the US debt ceiling drama. A deal between the Democrats and Republicans was finally reached in the last few days of the month, averting a potentially disastrous US technical debt default. The US labour market continues to show signs of strength as job growth numbers beat expectations. The Fed has signalled a possible pause in further tightening. There appeared to be further bifurcation of performance between different sectors as technology and AI-related industries received a boost from the increased interest in AI. The S&P 500 index was about flat for the month while the Nasdaq 100 rose 7.7%.

In Europe, markets saw a weak May as recent economic reports indicated a weaker economy amid persistent inflation, even as several countries reported a slowdown in price increases. Germany is now in a technical recession as its gross domestic product (GDP) in Q1 2023 declined further after a negative quarter in Q4 2022. The European Central Bank (ECB) signalled possible further rate hikes to combat inflation, as did the Bank of England (BoE). The MSCI Europe Index was down by about 5.9%.

Japan was one of the best-performing countries for the month. Japanese stocks continued to enjoy positive momentum, driven by a positive GDP growth in Q1 2023, strong domestic demand, and recovering tourism. The MSCI Japan Index rose 1.9% for the month.

Emerging markets ex-China eked out a positive gain of about 1.4%. But the region as a whole was dragged down by China as the latter declined 8.4% in May. China saw weaker-than-expected demand and economic data sparking a sell-off by disappointed investors.

Growth stocks, led by Big Tech, outperformed value stocks in May, while global large-cap stocks continued to outpace small-cap stocks.

Bond yields generally rose in the month, leading to negative returns for fixed income across most asset classes. The Bloomberg Global Aggregate Index retracted by about 2%. In most regions, investment-grade debt outperformed high yield. The US dollar continued to show strength against the G10 currencies.

The S&P GSCI — a benchmark for investment in the commodity markets — declined by about 6% as all the sectors within the index ended in negative territory in May.

Key performance highlights for the Endowus Portfolios in May

• The Flagship Equity Portfolio faced headwinds from its value bias and small cap tilt, while the Flagship Fixed Income Portfolio performed in line with the Bloomberg Global Aggregate Index.
• The ESG (environmental, social, and governance) Equity Portfolio had an outstanding month, boosted by the strong performance of growth stocks. The Fixed Income Portfolio, however, had a difficult time, challenged by its overweight to credit exposure.
• All three Income Portfolios delivered negative returns in May, partly due to their exposure to Asian bonds. For the Future Income and Higher Income portfolios, the equity sleeve was also a major detractor.
• All three Cash Smart solutions delivered positive returns for the month while maintaining projected yields of up to 4.9% per annum (p.a.).

Endowus Flagship Portfolio

The Flagship 100% Equity Portfolio trailed the global equity market in May

• The global equity markets — represented by the MSCI All Country World Index (ACWI) — managed to eke out a small positive return in May. Growth stocks rebounded in May, led by Big Tech. Emerging markets underperformed developed markets, and global small-cap stocks generally underperformed large caps.
• The Flagship 100% Equity Portfolio was flat for the month, underperforming the MSCI ACWI by about 60 basis points. The portfolio’s tilt to value and small-cap stocks via the Dimensional funds, as well as a slight overweight to emerging markets, detracted from relative performance.

The Flagship 100% Fixed Income Portfolio performed in line with the global fixed income market

• The global fixed income markets — represented by the Bloomberg Global Aggregate Index (hedged, SGD) — retracted by about 0.5% in SGD terms, as global bond yields increased across the board.
• The Flagship 100% Fixed Income Portfolio performed in line with the Bloomberg Global Aggregate Index. The top performer for the month was the PIMCO GIS Income Fund, which returned over 1%. This was however offset by the underperformance of the Dimensional Global Core Fixed Income Fund and the other two PIMCO funds: the PIMCO GIS Global Bond Fund and the PIMCO GIS Emerging Markets Bond Fund.

Endowus ESG Portfolio

The ESG 100% Equity Portfolio outperformed the global equity markets in May

• The portfolio’s lack of exposure to the energy sector contributed to its relative performance as energy was the worst-performing sector in May. Security selection within the healthcare and industrials sectors also contributed meaningfully to relative performance. 
• The portfolio’s growth tilt was also a significant contributor to performance as growth stocks generally outperformed value stocks. All the underlying funds outperformed the global equity markets in May.

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

• The portfolio’s shorter duration helped relative performance as global yields rose in May and bond prices fell across the board. However, this was offset by the overweight exposure to credit in the portfolio, which performed worse than the broader fixed income market, as represented by the Bloomberg Global Aggregate Index. 

Endowus Income Portfolios

The Stable Income Portfolio underperformed the global fixed income market, reversing its outperformance in April

• Relative to the global fixed income benchmark — represented by Bloomberg Global Aggregate Index — the portfolio’s allocation to the Asian bond fund was the biggest detractor in May.
• This was partially offset by the portfolio’s allocation to the short-duration emerging-market bond fund, as emerging-market bonds outperformed developed-market bonds while duration detracted in May.

The Higher Income Portfolio delivered negative performance in May

• The equity sleeve of the portfolio contributed to most of the relative underperformance, with the primary driver being the currency-hedging component. All the equity funds in the Higher Income Portfolio are hedged to the Singapore dollar (SGD). The meaningful appreciation of the US dollar (USD) against the SGD would have benefited the unhedged equity portfolio and hurt the hedged equity portfolio.
• On the fixed income side, similar to Stable Income, the Higher Income Portfolio’s allocation to the Asian bond fund was the biggest detractor on a relative basis. In addition, its overweight position in high yield was also a drag on relative performance.

The Future Income Portfolio delivered negative performance in May

• Similar to Higher Income, the equity component of the portfolio was the primary source of underperformance. The portfolio’s overweight to European equities and Asian equities, as well as its value bias, were significant detractors.
• On the fixed income side, similar to the other two portfolios, the Future Income portfolio’s allocation to the Asian bond fund was the biggest detractor.

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 a mark-to-market change (decrease or increase) in the portfolio value, but will not impact the actual coupon payments or dividend payouts from the underlying funds. 
• As the chart below shows, the annualised payout yields for the portfolios have been rising as a function of stable monthly payouts and lower net asset values from late 2021 to around October 2022. Since then, yields have remained elevated compared to historical levels.
• 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. 

Endowus Cash Smart Portfolios

Cash Smart Secure and Enhanced both generated positive returns in May

• The ultra short-duration approach of the Secure solution continued to prove beneficial. Its underlying funds — Fullerton SGD Cash Fund and LionGlobal SGD Enhanced Liquidity Fund — were able to capitalise on the higher yields in the market.
• The Enhanced Portfolio’s United SGD Fund dipped slightly over concerns around the US debt ceiling episode, but has since rebounded. The Fullerton SGD Cash Fund remained resilient in May.

Cash Smart Ultra generated positive returns in May

• The Ultra Portfolio’s primary detractors from performance for the month were the Nikko Shenton Income Fund and PIMCO GIS Low Duration Income Fund. 
• The funds declined slightly towards the end of May as the market turned cautious ahead of the US debt ceiling decision — after which both funds saw a rebound.

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

• The fall in bond prices has a negative mark-to-market impact, but this 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 managers of the underlying funds will continue to take advantage of this environment as they reposition their funds for the next few months.

With digital wealth platform Endowus, you can plan and manage your money — whether held in cash, CPF, or SRS — by investing in globally diversified, intelligent, low-cost portfolios seamlessly. To get started, click here.

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