US Economy posts strong Q3 growth
October saw the release of the third quarter GDP numbers for the US — a surprising 4.9% growth. Strong consumer spending arising from summer travel, amid other categories, generated these tailwinds. However, this level of economic expansion is not likely to be sustainable considering the many challenges faced by US consumers - higher mortgage rates, burgeoning credit card debt and slowing job growth, etc.
With 30 year mortgage rates hovering around the high 7% and in some areas, around 8%, and no concrete signs of that softening, the housing market has been a pain point for a large segment of Americans. Powell added more fuel to fire last Thursday, saying that policymakers “are not confident” interest rates are high enough to bring it down to their target 2% — sending major US indices tumbling.
Meanwhile, credit card debt in the US increased $154 billion USD from 2022 (Federal Reserve Bank of New York); a significant increase and the largest since 1999. The labour market also fettered, with growth in jobs slowing in October, to half that of September, a core statistic that significantly impacts consumer spending and confidence.
Fed pauses, again
The Fed, in their November 1 meeting, decided to pause on increasing the benchmark interest rates. Even though this was not unexpected by investors, the stock market gained on the news as market participants decided to focus on the marginally more dovish tone from Jerome Powell, the Fed Chairman. This was the second meeting in a row where the Fed had kept rates steady.
Negative sentiment weighed on both the equity and fixed income markets in October as bond yields rose again and recent geopolitical events, such as the Israel-Hamas conflict, added more uncertainty. While the market’s response has been muted so far, there have been a few areas where the impact has been more pronounced.
- Oil and Energy prices
There was some nervousness and uncertainty around supply chain disruption as news of the conflict broke. Following the incursion on October 7, the price of Brent oil shot up by less than 10% over the subsequent days but started to fall afterwards. However, most analysis point towards the containment of the conflict and that it is unlikely to spread to the large oil producing countries such as Saudi Arabia, Iraq and Iran in the short term.
- Israel stock market
Israeli stocks declined about 12.6% in October in USD terms; some of the decline could be attributed to the sharp drop in the Israeli Shekel against the US dollar. While Israel was one of the worst performing markets in October, it was also one of the strongest performers month-to-date (9 November 2023). The rebound of the Israeli Shekel against the US dollar was a major contributor to the currency’s performance year-to-date.
- Israel’s credit rating
One area where there might be lasting impact is Israel’s credit rating. Fitch placed Israel’s “A+” rating on RNW (Rating Watch Negative) status on 17 October 2023, citing heightened geopolitical risks as one of the driving factors. Moody’s, a couple of days after, placed Israel’s “A1” rating under review, due to the severity of the conflict with Hamas. S&P announced shortly after Moody’s warning, that it was maintaining Israel’s “AA-” rating but with a negative outlook.
Uncertainty was the overarching theme of October’s stock market and in Sam’s latest article, he discusses how markets perform during times of war and conflict. The TL;DR to the article is — markets are oftentimes rational and focus on core business fundamentals to bring it back to normalcy.
October market commentary
The global equity markets extended September’s losses in October with the MSCI ACWI (All Country World Index) declining about 3% in USD terms. The US outperformed on a relative basis versus other major markets, retracting 2.3%. Europe had a slightly tougher time with the MSCI Europe index falling 3.7% (USD terms). While the European Central Bank (ECB) decided to pause on further rate hikes in October, the higher interest rates had already exerted its influence, causing a marginal contraction on the Eurozone economy in the third quarter (-0.1%). As for China, the coupling of negative investor sentiment and ongoing property crisis continues to weigh on the stock market with the MSCI China index dropping by 4.3%. Japan as well, was not spared from the general weaker investor sentiment as it fell 4.5% (MSCI Japan index). And emerging markets, in general, underperformed developed markets in October.
In terms of factors, value stocks generally underperformed growth stocks in October and small cap stocks again lost to their larger cap peers. A trend that was consistent in both developed and emerging markets.
Bond markets, too, fell across the board in October. While US yield curve steepened and European bonds generally fared better than the other regions, Japan government bonds were down about 1.6% (in local currency) as concerns lingered over Bank of Japan’s yield curve control policy. Sovereign debt generally outperformed both global corporate investment grade and high yield bonds, with high yield remaining more resilient than investment grade bonds.
Commodities, as represented by the S&P GSCI, contracted about 4% in October. Gold retained its coveted safe haven status, as it regained favour with investors, returning 7.4% for the month. Energy and crude oil declined 6.8% and 8.7% respectively while Agriculture had a positive month, with a 0.6% return.
Key performance highlights for the Endowus Portfolios in October
- 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 was almost flat against the benchmark.
- The ESG (Environmental, Social, and Governance) Portfolios lagged both the global equity and fixed income markets due to challenges from the Portfolio’s exposure to clean energy theme on the equity front, and overweight allocations to emerging-market debt and credit on the fixed income side.
- All three Income Portfolios lagged their benchmarks by a modest margin, facing headwinds on both the equity and fixed income components. However, all three portfolios continue to achieve their payout targets.
- All three Cash Smart solutions continued to generate positive returns in October as well.
Endowus Flagship Portfolio
The 100% Equity Portfolio underperformed the global equity markets in October
- The global equity markets — represented by the MSCI All Country World Index (ACWI) — fell in October, contracting by about 2.7% in SGD terms. Emerging markets, in a reversal from the previous month, underperformed developed markets. Value stocks extended their loss against growth stocks and small caps once again underperformed large cap stocks.
- 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 underperformed the global fixed income markets by a slight margin
- The global fixed income markets — as represented by the Bloomberg Global Aggregate Index — fell across the board in October.
- Most of the underlying fixed income funds in the portfolio underperformed against the broad benchmark, with the exception of the Amundi Global Aggregate 500 MM index, which performed in line with the Bloomberg Global Aggregate index. The portfolio’s allocation to EM bonds and its general overweight in corporate bonds detracted from relative performance.
Endowus ESG Portfolio
The ESG 100% Equity Portfolio lagged the broader equity market in October by 1.2 percentage point
- The portfolio’s exposure to the clean energy theme through the Schroder ISF Global Climate Change Equity Fund contributed most meaningfully to its relative underperformance, as the sector experienced meaningful correction.
- On the other hand, Mirova Global Sustainable Equity Fund was resilient in October and cushioned the downside slightly.
The ESG 100% Fixed Income Portfolio underperformed the broad fixed income market in October by 0.3 percentage point
- The ESG 100% Fixed Income Portfolio is overweight on credit risk and emerging markets bonds. This allocation led to a detraction from its relative performance in October.
- However, the portfolio’s shorter-duration positioning helped to partially offset the relative negative performance.
Endowus Income Portfolios
The Stable Income Portfolio underperformed the broad fixed income market in October by 0.3 percentage point
- The portfolio’s overweight exposure to credit risk and emerging markets debt weighed on performance.
- That said, the portfolio’s shorter-duration positioning had a positive impact, cushioning some of the underperformance.
The Higher Income Portfolio underperformed the 20-80 benchmark in October by 0.7 percentage point
- On the fixed income front, similar to Stable Income, the portfolio’s overweight exposure to credit and emerging markets debt detracted from relative performance. However, its shorter duration helped cushion some of the downside.
- On the equity front, the portfolio’s exposure to listed real assets contributed to relative underperformance. On the other hand, JP Morgan Emerging Markets Dividend Fund contributed positively to relative performance. Despite the overall emerging markets underperforming the global equity market in October, the fund itself delivered meaningful outperformance.
The Future Income Portfolio underperformed the 40-60 benchmark in October by 1.2 percentage points, after it had outperformed in July
- On the fixed income front, the portfolio’s overweight exposure to credit and emerging markets debt detracted from relative performance, while its shorter duration position helped.
- On the equity front, the portfolio’s tilt towards value and small cap factor contributed to relative underperformance as October saw another month of outperformance in large cap growth. In addition, its allocation to Asian and European equities detracted too as these markets lagged the global equity market in October.
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 conducted a Recommended Portfolio Change (“RPC”) for 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 referring to the OLD versions of Enhanced and Ultra, as it highlights returns up to 31 October 2023 (prior to the RPC).
Cash Smart Secure and Enhanced continued to generate stable and positive returns
- The Secure and Enhanced portfolios delivered positive returns in October 2023.
- Their underlying funds continued to do well through their relatively short duration positioning.
Cash Smart Ultra ended October on a relatively muted note
- The Ultra portfolio saw modest returns in October, primarily influenced by geopolitical tensions and general market uncertainty. This gave a slight drag to relatively market-sensitive funds like Nikko Shenton Income and PIMCO GIS Low Duration Income.
- The portfolio's other underlying funds contributed to relative performance amid market volatility, offsetting the negative impact and buoying Ultra into a muted zone.
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 make up the portfolios.
- The rising rate environment provides 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. The managers of the underlying funds will continue to take advantage of this environment as they reposition their funds over the next few months.
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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