Nedgroup Inv Global Cautious comment - Jun 14
June was a positive month for global equity and bond markets. Japan had a particularly strong month, clawing back some of this year's earlier losses amid news that the impact of the consumption tax rate rise was not as bad as had been expected and Prime Minister Shinzo Abe's announcement of a new growth strategy. Emerging markets also rose. The Chinese economy appeared to have bottomed by the end of June following the mini stimulus packages announced in the Spring. Monetary policy took centre stage in Europe, as the European Central Bank (ECB) announced targeted long-term refinancing operations aimed at stimulating bank lending and credit growth in the region. European equity market returns were negative in June, with financials being particularly weak. However, the latest Eurozone composite purchasing managers' index reading suggested that the region's peripheral states are making good progress in catching up with the core countries. In the US, investors began to question the Federal Reserve's dovish stance given the falling unemployment rate and slowly building inflationary pressures, and what this means for interest rates. Real bond yields have already begun to price in more normal policy settings ahead.
The Nedgroup Investments Global Cautious Fund's core investment themes remained little changed from the previous month. By region, we continued to favour the US, where economic data is improving. Our long Europe ex UK failed to add value as the market fell slightly, while our small short position in Japan was negative as the region was the strongest performer in local currency terms. The core themes within stock selection, which performed strongly, remained little changed. Our significant exposure to healthcare was the biggest contributor to performance, while we also had a large allocation to UK homebuilders.
In fixed income, we were short duration in the US, which was negative for performance as the regional bond market rallied. We held a bias towards Italian duration, which initially performed strongly after the ECB announcement but gave back some of these gains later in the month. We remained long Australian duration as real yields are positive and this trade is sympathetic to our view that the serious imbalances in the Chinese economy could result in a much sharper slowdown in growth than currently anticipated.
We maintain a constructive view on risk assets, but our conviction level remains relatively low. Asset prices have moved a long way: equity valuations have expanded while real bond yields have already begun to adjust to more normal policy settings ahead. The start of a US rate hiking cycle is now just a year away, a different type of monetary regime than the one we have grown used to. We continue to look for an acceleration in global growth, led by stronger activity in the US and Europe. At the same time reliance on extraordinary monetary accommodation will decline as we progressively move away from zero interest rates. Regional variations in the speed of normalisation will have implications for asset prices, with relative value decisions likely to assume greater significance. Fundamentals remain supportive of equities. Earnings growth is bottoming across regions and while equity valuations are now only around neutral on equity-only metrics, they remain attractively valued relative to bonds. We maintain a preference for developed over emerging markets.
We maintain conviction in the US and Europe ex UK, and at the sector level, continue to have a bias towards healthcare. Despite the recent uptick, we remain neutral in our view on emerging markets. In fixed income, we expect to maintain low levels of duration.
The net effective equity exposure (delta) of the portfolio at 30 June is 33% and is a function of
- Physical equity exposure
- Plus option/future strategies (could increase or decrease net exposure)
- Plus convertibles exposure (could increase net exposure. This is not the same as actual convertible holdings)
The portfolio is suitable for investors seeking medium to long term exposure to a diversified multi-asset portfolio of global investments, with a focus on fixed income, whilst being prepared to accept a degree of volatility in performance. The portfolio will have a maximum equity exposure of 30%. The portfolio will be subject to currency fluctuations due toits international exposure. The portfolio is rand-denominated, which provides investors who may have utilised their full individual offshore allowance an opportunity to obtain additional exposure to international markets.
The underlying fund of the portfolio is USD-denominated and therefore this feeder fund is subject to currency fluctuations. Rand strength will have a negative impact on the rand-denominated performance and rand weakness a positive impact.