To The Moon

Hopes for a global market recovery seems to be bleak at this point. With inflation sitting at elevated levels and showing no signs of abating in western developed markets, Central Banks’ have constantly fired aggressive rate hikes in their quest to quell inflation that threatens growth. Even so, in Asia, markets are not performing well too. The Chinese market which many market participants expect to see a rebound this year following regulatory crackdowns disappointed as well. That being said, not all is gloom for global markets. In the month of October, markets have edged higher following two full months of sell off.

Asset class performance: Equities came out on top

Global equities managed to avoid another month of decline despite tightening monetary conditions while Global Bonds fell yet again. Global equities as gauged by the MSCI World Index delivered returns of 4.94% in USD terms while Global Bonds as gauged by the Bloomberg Barclays Global Aggregate Index handed investors a loss of 1.53% in USD terms.

Broadly, trading within the equity space remains volatile in October. Worries about inflation, monetary policy, currency movements and a bevy of other factors saw equities grinding lower to start the month. However, a turnaround was witnessed as the month progressed. A better-than-expected start to the 3Q earnings, marginally lower inflation readings compared to the month prior and GDP print that was above consensus forecast uplifted market participant’s sentiments and hence a rally occurred.

On the fixed income front, yields continued to march higher for the bulk of the month as slowing manufacturing data and persistently elevated price pressures renewed growth concerns – yields fell only towards the end of the month as positive GDP print reassured markets that the magnitude of a growth slowdown is not as great as perceived.

Chart 1: Yields trended higher on recessionary fears. Source: Bloomberg

Geographical: Developed markets outperforms Emerging markets

Developed markets (DMs) performed better than its emerging markets (EMs)peers – the DM index registered a positive return of 3.67% in SGD terms while the EM Index declined 4.59% in SGD terms. In this vein, we continue to hold the opinion that the poorer performance in the EM segment is likely attributed to the strength of the greenback – the dollar rally was spurred by i) the rapid rise in interest rates in comparison to other developed nations, ii) the war in Ukraine attracting market participants in droves to the traditional safe haven and iii) a mounting risk of recession triggering a surge in demand for the dollar.

In essence, the rise of the dollar has brought about more headwinds to EM which we believed resulted in capital flight amongst market participants. Additionally, the woes surrounding Chinese equities have also acted as a drag to emerging equities – lockdown measures are unlikely to be lifted in time to come as China experiences a new wave of virus cases as of late.

Within western DMs, European equities once again outperformed US equities – strong earnings report by European companies appeared to have offset fears of aggressive rate hike, inflation, and recession. Looking to Asia, Korean equities that have been beaten down since the slight gain that was last seen in May this year caught our attention. Korean equities in the month of October have outdone all its Asian peers by a margin due to a rally after the government pledged at least 50 trillion won to prop up credit markets in an effort to soothe worries about rising default risks in key sectors including real estate.

Chart 2: Performance of global equity markets were mixed. Source: Bloomberg

Sector: A month filled with optimism

All sectors recorded returns in the green for market participants, an encouraging sign given a poor year for global equity market. To begin, let’s look at the poster child of the year. Following a decline the month prior the energy sector made-up lost ground – the sector attained a return of almost 20% to top the table followed by the industrial and financial sector with gains of 10.3% and 9% respectively.

The stellar performance of the energy sector was thanks in part to oil prices picking up again, bolstered by i) the OPEC+ cutting production by 2 million barrels a day (the largest reduction since 2020), ii) a weaker dollar supporting demand and iii) a record US crude export. More notably, the financial sector that we favor in the prevailing macroenvironment has finally come alive. Nonetheless, the rally of the financial sector in our view still has legs. Tailwinds such as i) rising interest rate, ii) an acceleration of FinTech trends and iii) attractive valuations will continue to drive the sector’s return in both the medium and long term.

Chart 3: All sectors are in positive territory this month. Source: Bloomberg

Chart 4: Oil prices ticked up after cooling off for months. Source: Bloomberg

Our thoughts ahead

We do not expect a swift return to the subdued inflation readings witnesses before the twin shock of the pandemic and the war in Ukraine, neither do we think that monetary tightening will end this year or early next year. Investors should brace themselves for a bumpy ride ahead and we advocate the tenets of diversification.Pockets of opportunities are still available and the sector we favour at the current juncture is the financial sector. Style wise, we believe that the stars have aligned for the growth style. Supporting our opinion is the fact that valuations have corrected meaningfully and therefore presenting an attractive opportunity. Furthermore, growth companies are generally less affected by the broader economy’s performance – earnings of cyclical companies should fall off as the economic growth slows.

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