Insights
Winds are changing?
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November 10, 2021
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Winds are changing?
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November 10, 2021
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Winds are changing?
Winds are changing? |
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Markets bounced back strongly in October with the S&P 500 and MSCI Europe Index up 7.0% (USD) and 4.7% (EUR) respectively1. The MSCI Emerging Markets Index was also up 1.0% (USD)1. In contrast, the MSCI Japan Index was down over the month at -1.2% (JPY)1. Energy continued to be the best performing sector, with the MSCI ACWI Energy Index up 6.4% (USD)1, on the back of rising prices and persistent supply bottlenecks. As markets recovered, the VIX moved down to 162 by month end.
Rising Energy prices…cause of worry?
The origin of recent rises in gas prices in Europe can be traced back to higher than average consumption last winter, leading to depleted storage inventories across Europe. Additionally, inadequate supply from Russia in 2021 has exacerbated the situation. With winter approaching, further strain on supply from a colder than average winter could keep gas prices at elevated levels. However, the impact of higher gas prices on consumer spending and growth should be limited due to the lagged and partial pass-through to energy bills across European countries, along with notably elevated pent-up savings level of consumers. Moreover, we expect that additional supply from Russia will ease the squeeze in the coming months, further suggesting that the impact on inflation and growth should be limited.
Central Banks start to scale back accommodation
US 10-Year Treasury rates continued to move up from 1.5%2 at the end of September to close the month at 1.55%2. The FOMC’s slight hawkish tilt in September indicated a desire for a somewhat quicker pace towards policy normalisation as inflation upside risks persist. If supply bottlenecks and rising energy prices continue to feed through to higher costs of living and eventually wage inflation, we may be nearing the end of the Fed’s wait-and-see approach. Although we expect the Fed to announce tapering in November and to conclude it by the middle of 2022, the overall policy will likely continue to remain accommodative. We expect rates to likely continue to grind modestly higher, but believe they will settle at lower levels than in previous cycles. There are indications that fixed income investors are becoming more concerned about inflation risk, however, which could increase the pace of central bank normalisation.
China Property Risks: Systemic or idiosyncratic?
Although some of the highly indebted Chinese property companies have continued to make global headlines throughout October, the risk of a global systemic shock remains remote in our view. While China is currently suffering from multiple headwinds, we think the government possesses the willingness and appropriate policy tools (e.g. cutting the required reserves ratio, increased fiscal spending, quicker loan approvals and lowering the down payment ratio and mortgage costs) to lend strong support to the property sector and stabilise the wider economy at this stage. We should expect some power rationing to continue during Q4, but aggressive reforms already introduced by some key ministries offer the opportunity of easing supply chain pressures and more stable prices in key commodities over the coming months.
Investment implications
As a result of the recent low realised market volatility, we fine-tuned our portfolios, increasing equity exposure mid-month to ensure that our portfolios continue to be in line with their respective risk-targets. The abatement of risk from near-term events like the FOMC meeting in September and the subsequent minutes published in mid-October, also provided support. That said, we are keeping an eye on the expected Fed tapering plan and announcement next month. We remain underweight duration as fixed income valuations still appear rich given the constructive macro backdrop and the potential reversal of the support provided to duration by some technical factors in Q3.
Tactical positioning
We have provided our tactical views below:
Source: MSIM GBaR team, as of 31 October 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 31 October 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.
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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