UK & EU – For professional and institutional investors only
Switzerland – this is an advertising document for professional and institutional clients as defined by the Swiss Financial Services Act only
There was a month of respite for traditional asset classes across the board in November as US inflation numbers came in below consensus.
The beginning of the month was more uncertain as central banks continued on their hawkish trajectory, with further 75bps rate rises on both sides of The Atlantic. However, sentiment quickly shifted as US inflation came in at 7.7% YoY, giving investors hope that the worst of inflation and therefore tighter conditions were behind them.
Adding to the buoyant mood were developments in China, where unrest seems to have softened Xi Jinping’s stance on zero-covid policy. The problem China has is the lack of vaccinated peoples in the country, particularly the old, and the efficacy of the vaccines that were used. The problem the world may have is the potential for a meaningful Chinese reopening to unleash a further wave of demand and put on hold or even reverse any hopes of a pivot.
The Fund posted a return of -0.2% for the month.
The Diversifier portfolio returned 0.1% over the month.
The commodity curve and congestion strategies were positive contributors, benefitting from the weakness seen in oil as curves began to normalise somewhat at the front end. However, the Fund’s gold intraday strategy suffered on the continued non-normal gold price moves seen of European hours outperforming Asian hours.
As one might expect, given the moves seen in rates post-CPI print, the rates volatility strategies were slightly down, whilst the 2s10s steepener was flat. The yield curve inversion now sits at levels not seen since the 1980s and the eventual reversion will be to the benefit of the position.
The Fund’s FX strategies, which had been negatively impacted by the dollar’s strength, particularly against the yen, posted gains and are likely to be the beneficiaries of any continued mean reversion in FX markets.
The Protection portfolio was the biggest negative contributor at -0.3% as credit spreads narrowed on Fed pivot hopes.
The Income portfolio added 0.1%. The Fund is fully collateralised with short-dated bonds, and given where rates have moved this year, an annualised return of over 3.5% is now achievable from this part of the portfolio that previously yielded very little.
The market seems to have taken the latest inflation numbers from the US as the sign needed to expect inflation to fall from here and allow the Fed to pivot earlier than previously expected. As is the norm now, everything must be binary; inflation is either cyclical or structural. The reality is more likely that there are both cyclical and structural elements at play, and it is perhaps telling that it was the more cyclical elements of finished goods and autos that drove the number lower last month. Stickier components like shelter and food remain elevated and the structural implications of deglobalisation are likely here to stay.
Whilst inflation falling back to levels where most market participants are still anchored would be ideal, the prospect that central banks may struggle to achieve this without doing significantly more to kill demand is a real one, and one investors must keep taking seriously, irrespective of what December’s CPI print brings. There is a lot further to go before any victory over inflation can be celebrated.
|Hong Kong 50||-17.9%||25.3%|
|US Equity Income||-13.4%||4.8%|
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