Insights
Winter is Coming?
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October 08, 2021
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Winter is Coming?
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October 08, 2021
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Winter is Coming?
Winter is Coming? |
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Markets became jittery over September, with the realisation that summer has come to an end and winter is coming. The S&P 500 and MSCI Europe Index experienced their first monthly fall since January 2021, moving down -4.7% (USD) and -2.9% (EUR) respectively1. In contrast to the other developed markets, the MSCI Japan Index was up over the month at 4.5% (JPY)1. The best performing sector was energy, with the MSCI ACWI Energy Index up 9.1% (USD)1 on the back of rising energy prices, whilst most other sectors moved down. Energy prices could in part be to blame for the move up in yields, as the closely watched US 10-Year yield moved up to 1.5 from 1.3 at the end of August2. In turn, the VIX moved up to 232 by month end, the highest since May’s market jitters.
A focus on Japan and China
The surge in Japanese equities, which began the last week of August, continued in September as Prime Minister Suga resigned due to the handling of the pandemic. By month end, Fumio Kishida had been voted in by the ruling Liberal Democratic Party, as the new Japanese Prime Minister, indicating that there is likely to be more of the same. Therefore, this could be interpreted as not necessarily a negative or a positive catalyst. The exuberance seen earlier in the month appears to have been short-lived as a debt crisis involving one of China’s largest property developers began dominating headlines, leaving Japanese equities to languish the second half of the month. Indeed, the giant Chinese property developer rocked markets across the globe, especially in Asia. The MSCI China Index (HKD), was down -5.0%1 over September, as it continued to be one of the worst performing countries year-to-date.
Growth slowing, but likely to remain healthy
As we had been expecting, there has been a material slowdown in the rate of change of growth. However, this is from a high level to normal, but still healthy growth. Whilst inflation has been a concern for some time in the wake of global reopenings, the August US headline CPI rose 5.3% YoY, and 0.3% over the month,3 which is less than expected. That said, rising energy prices are not likely to feed into inflation immediately and supply shortages are also not going away, raising the question of whether inflation is in fact transitory. Valuations and positioning suggest caution with many market indicators continuing to show stretched levels. The S&P 500 12-month forward PE is currently 20.7, compared with the median of 15.0.4 Moreover, we expect that the move up in rates is not positive for US equities, which tend to be high duration. Indeed, this has impacted rate sensitive sectors, whereas energy stocks in contrast have done well. We are keeping an eye on key events on the horizon, including the looming US debt ceiling and the upcoming US earnings season.
Investment implications
We have reduced risk over the month in two stages, as we believe there is likely to be limited upside to equities for the remainder of the year. Given high valuations and fragile, risk-off sentiment, we are concerned that there could be a market correction and elevated volatility. At the same time, we are seeking opportunities to take advantage of any excessive weakness.
Chinese Internet Equities
We have implemented a modest initial overweight to Chinese Internet Equities. Whilst China has been hard hit this year, there are some potential pockets of opportunity. Regulatory headwinds to China Internet seem to be stabilising, with fundamentals of key companies remaining strong. Since the February 2021 peak, there has been a more than 50% decline in China Internet,5 making valuations fairly attractive. While volatility is likely to remain high in the near-term, the disconnect between fundamentals and valuations makes the risk rewards of the trade skew slightly to the upside.
Tactical positioning
We have provided our tactical views below:
Source: MSIM GBaR team, as of 30 September 2021. For informational purposes and does not constitute an offer or a recommendation to buy or sell any particular security or to adopt any specific investment strategy. The tactical views expressed above are a broad reflection of our team’s views and implementations, expressed for client communication purposes. The information herein does not contend to address the financial objectives, situation, or specific needs of any individual investor.
Source: MSIM GBaR team, as of 30 September 2021. For informational purposes and does not constitute an offer or a recommendation to buy or sell any particular security or to adopt any specific investment strategy. The tactical views expressed above are a broad reflection of our team’s views and implementations, expressed for client communication purposes. The information herein does not contend to address the financial objectives, situation, or specific needs of any individual investor.
The index performance is provided for illustrative purposes only and is not meant to depict the performance of a specific investment. Past performance is no guarantee of future results. See Disclosure section for index definitions.
RISK CONSIDERATIONS
There is no assurance that the Strategy will achieve its investment objective. Portfolios are subject to market risk, which is the possibility that the market values of securities owned by the portfolio will decline and that the value of portfolio shares may therefore be less than what you paid for them. Market values can change daily due to economic and other events (e.g. natural disasters, health crises, terrorism, conflicts and social unrest) that affect markets, countries, companies or governments. It is difficult to predict the timing, duration, and potential adverse effects (e.g. portfolio liquidity) of events. Accordingly, you can lose money investing in this portfolio. Please be aware that this strategy may be subject to certain additional risks. There is the risk that the Adviser’s asset allocation methodology and assumptions regarding the Underlying Portfolios may be incorrect in light of actual market conditions and the Portfolio may not achieve its investment objective. Share prices also tend to be volatile and there is a significant possibility of loss. The portfolio’s investments in commodity-linked notes involve substantial risks, including risk of loss of a significant portion of their principal value. In addition to commodity risk, they may be subject to additional special risks, such as risk of loss of interest and principal, lack of secondary market and risk of greater volatility, that do not affect traditional equity and debt securities. Currency fluctuations could erase investment gains or add to investment losses. Fixed-income securities are subject to the ability of an issuer to make timely principal and interest payments (credit risk), changes in interest rates (interest-rate risk), the creditworthiness of the issuer and general market liquidity (market risk). In a rising interest-rate environment, bond prices may fall and may result in periods of volatility and increased portfolio redemptions. In a declining interest-rate environment, the portfolio may generate less income. Longer-term securities may be more sensitive to interest rate changes. Equity and foreign securities are generally more volatile than fixed income securities and are subject to currency, political, economic and market risks. Equity values fluctuate in response to activities specific to a company. Stocks of small-capitalization companies carry special risks, such as limited product lines, markets and financial resources, and greater market volatility than securities of larger, more established companies. The risks of investing in emerging market countries are greater than risks associated with investments in foreign developed markets. Exchange traded funds (ETFs) shares have many of the same risks as direct investments in common stocks or bonds and their market value will fluctuate as the value of the underlying index does. By investing in exchange traded funds ETFs and other Investment Funds, the portfolio absorbs both its own expenses and those of the ETFs and Investment Funds it invests in. Supply and demand for ETFs and Investment Funds may not be correlated to that of the underlying securities. Derivative instruments can be illiquid, may disproportionately increase losses and may have a potentially large negative impact on the portfolio’s performance. A currency forward is a hedging tool that does not involve any upfront payment. The use of leverage may increase volatility in the Portfolio.
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Managing Director
Global Balanced Risk Control Team
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Managing Director
Global Balanced Risk Control Team
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