Best month in 3 years
Market participants heaved a collective sigh of relief as both the equity and fixed income markets enjoyed a strong rebound in November after an underwhelming September and October. In fact, November 2023 was the best month for both equities and bonds in the past 3 years. The MSCI ACWI was up about 9.2% (in USD terms) while the Bloomberg Global Aggregate climbed 3.4% (hedged, USD).
Rate hikes are working
The macro backdrop supporting the rise in the market returns can be essentially distilled into three key components.
- Central banks (US and Eurozone) pausing on further rate hikes
- Declining core and headline inflation across the major economies
- The U.S. October Jobs report released in November indicated a slowdown in the pace of hiring and unemployment rate ticked up slightly to 3.9% from 3.8% in September
All three components signalled that the rate hikes are working their way into the economies and that inflation might have finally peaked. Economic growth also seems to be slowing, which led market participants to speculate that interest rate cuts may be coming sooner rather than later.
The December 13 Fed meeting further bolstered positive market sentiment when they decided to keep rates steady for the third time — 5.25 to 5.5%. Further exuberance ensued with FOMC forecasts that call for potentially 3 rate cuts of 0.25% each in 2024.
While the Fed found that “the inflation has eased over the past year”, it remains elevated. While the tone was more “dovish”, Powell cautioned that further rate hikes remain a possibility. Powell also remarked that “growth above long-run trends is not a problem on its own” and that the healing of supply chains has allowed the economy to grow without a corresponding large increase in prices.
The full Fed statement can be found here.
November market commentary
November was indeed a month to remember as both the equity and fixed income markets rebounded with a vengeance amidst falling inflation and slowing job growth in the US. The global equity markets (as represented by MSCI ACWI) was up 9.2% with developed markets generally outperforming emerging markets. The US market (MSCI USA Index) rose 9.4% while Europe grew by 9.9%. EM lagged at 8% but not by a significant margin.
In terms of factors, value stocks generally underperformed growth stocks again in November while global small cap stocks eked out a marginal gain over large cap stocks. Small caps in EM, bucked the trend, outpacing their large cap peers by about 1.6%.
The bond markets similarly displayed robust performance as yields declined. Bonds with longer maturities surpassed those with shorter maturities in terms of performance, and taking on credit risk proved advantageous during the period. Corporate bonds were able to generate better returns than sovereign bonds during the month but hard currency EMD sovereigns (in USD) delivered bumper returns, churning out 5.7% for the month.
Unlike the previous two asset classes, the S&P GSCI Index experienced a decline in November. Notably, the energy and livestock segments of the index exhibited the poorest performance. Conversely, precious metals, industrial metals, and agriculture sectors showed marginal gains within the same period. In the energy sector, oil prices experienced a modest decrease due to market uncertainty stemming from concerns regarding OPEC's production quotas.
Key performance highlights for the Endowus Portfolios in November
- The Flagship 100% Equity Portfolio underperformed the global equity market due to its structural biases in small caps, value, and emerging markets. The Flagship 100% Fixed Income Portfolio, with its significant credit exposure, outperformed the broad fixed income benchmark.
- The ESG (Environmental, Social, and Governance) Portfolios enjoyed strong rebounds in November as the equity portfolio benefited from its strong growth exposure while the fixed income portfolio received a lift from the credit exposure.
- The Stable and Higher Income Portfolios outperformed their respective benchmarks by a significant margin, enjoying tailwinds from their credit exposure, longer duration position and real assets allocation. The Future Income Portfolio, in contrast, slightly underperformed because of the structural allocations in its equity sleeve. However, all three portfolios continue to achieve their payout targets.
- All three Cash Smart solutions continued to generate positive returns in November as well.
Endowus Flagship Portfolio
The 100% Equity Portfolio lagged the global equity markets in November
- The global equity markets — represented by the MSCI All Country World Index (ACWI) — experienced a notable recovery in November, returning 6.4%, in SGD terms. While the EM as a region posted positive returns during this period, it still lagged developed markets by a slight margin. In a recurring trend, value stocks, during the month, underperformed growth stocks. Small cap stocks, with the exception of those in EM, did not keep pace with their larger counterparts.
- The Flagship 100% Equity Portfolio faced headwinds from all fronts, with its tilts towards value stocks, small-cap stocks and a slight overweight in emerging markets.
The 100% Fixed Income Portfolio outpaced the global fixed income markets by 0.2%
- The global fixed income markets — as represented by the Bloomberg Global Aggregate Index — gained during the month of November, boosted by declining interest rates.
- Most of the underlying fixed income funds in the portfolio either outperformed or matched the broad benchmark’s returns. The portfolio’s allocation to EM bonds and its general overweight in corporate bonds were some of the major contributors to relative performance.
Endowus ESG Portfolio
The ESG 100% Equity Portfolio outperformed the broader equity market in November by 2.4 percentage point
- The portfolio benefited from its exposure to growth style, as large cap growth stocks outperformed the broader equity market in November.
- All three underlying funds delivered outperformance, with Mirova Global Sustainable Equities Fund being the best performer.
The ESG 100% Fixed Income Portfolio outperformed the broad fixed income market in November by 0.7 percentage point
- The ESG 100% Fixed Income Portfolio being overweight in credit risk, contributed to its relative performance in November.
- All three underlying funds outperformed the broad fixed income market, with JPM Global Bond Opportunities Sustainable Fund leading the charge.
Endowus Income Portfolios
Note: this performance update is for Income Portfolios pre-recommended portfolio changes (RPC), launched on November 29th. From next month onwards, we will be providing performance updates for the post-RPC portfolios. For more details, please refer to our insights article.
The Stable Income Portfolio outperformed the broad fixed income market in November by 0.4 percentage point
- The portfolio’s overweight exposure to credit risk contributed to relative performance as credit spread tightened.
- Duration exposure was also beneficial as yields fell in November. AB American Income Portfolio was the strongest performer due to its longer duration positioning.
The Higher Income Portfolio outperformed the 20-80 benchmark in November by 0.8 percentage point
- On the fixed income front, similar to Stable Income, the portfolio’s overweight exposure to credit contributed to relative performance.
- On the equity front, the portfolio’s exposure to listed real assets was the top contributor to outperformance, as stocks in this segment rallied, on the increased hope of rates peaking with a soft landing for the economy. The portfolio’s emerging market equity exposure detracted from relative outperformance slightly in November as EM underperformed DM.
The Future Income Portfolio underperformed the 40-60 benchmark in November by 0.2 percentage point
- On the fixed income front, the portfolio’s overweight exposure to credit contributed to relative outperformance.
- On the equity front, the portfolio's tilt towards value and small-cap factors, along with its greater exposure to Asian and emerging market equities, did not fare as well, given that large-cap, developed market, and growth stocks generated superior performance in November.
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.
- 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 Enhanced & Ultra - new allocations
- As of 9 November 2023, we have initiated a Recommended Portfolio Change (“RPC”) for the Cash Smart Enhanced and Ultra portfolios.
- There has been a change to fund allocations in the two portfolios with the aim to decrease risk exposures.
- Please note that the performance commentary shown in this article is a composite of the old and new versions of the Cash Smart Enhanced and Ultra portfolios; November 2023 shows the post-RPC version, while past performance is calculated using the pre-RPC portfolios up until end October 2023.
Cash Smart Secure and Enhanced continued to generate stable and positive returns
- The Secure and Enhanced portfolios delivered positive returns in November 2023.
- Their underlying funds continued to do well due to their relatively short duration positioning.
Cash Smart Ultra ended November on a relatively muted note
- The Ultra portfolio delivered positive returns in November, primarily buoyed by the positive sentiment in the fixed income markets.
- All underlying funds contributed to the positive performance, with longer duration funds, such as the United SGD fund, being the major driver of performance.
Cash Smart projected yields have started to decline slightly from peak yields
- As the markets started to price in the possibility of peaking interest rates and potential rate cuts, money market and short duration bond funds saw a slight decrease in yields.
- The rising rate environment in the past two years has provided an opportunity for the managers of the underlying funds to reinvest and allocate the coupon payments and cash from maturing bonds to higher-yielding bonds.
Note that the projected yield range as of 31 October 2023 is reflecting that of the new Enhanced and Ultra portfolios.
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