14th August 2023
[Link] VCC -
Global Balanced Advantage Fund
Investor Newsletter
Market Update
July was a continuation of risk-on sentiment from June. First on macro data, we
continued to see resilience in the US, within developed markets. PMIs continued to stay
well above 50, strength in core durable goods orders, resilient labor market data
(despite some cooling off lately) and housing data remained quite robust. However,
things were not as rosy in Europe and China. European data decelerated as composite
PMI fell below 50. German manufacturing experienced a sharp slowdown and sentiment
measures like ZEW economic sentiment and IFO Business Climate Index both declined.
Chinese credit impulse, Caixin manufacturing PMI and fixed asset investment also fell.
This dispersion in growth across regions is an interesting one to watch, especially as
the first derivative of growth starts to slow.
At the same time, inflation continued to come down across regions – the US, UK, Europe
and China also registered declines in both headline and core inflation. This should help
ease the pressure on central banks and raises odds of a soft landing. On the latter,
consensus is slowly but surely shifting to a soft landing in the US. The latest BofA fund
manager survey showed 68% of respondents expecting a soft landing. This could imply
that if this view starts to get challenged, we could see a big reversal in asset prices –
esp. important to watch for this in Europe.
July was also heavy on central banks front – The Fed and the ECB both expectedly
hiked rates by 25bps. While we might get another hike or two, we are clearly towards the
fag end of the hiking cycle, more so in Europe given the recent weakness in data. But
the highlight of central bank action was Japan as the BOJ unexpectedly widened the
band around its yield curve control by 50bps, allowing for a more controlled rise in
interest rates.
Equities had a fairly strong month with global equities rising 3.6% - led by strength in
emerging markets (due to policy easing expectations in China) and global technology.
On the other hand, European equities underperformed driven by weak data. Within the
fixed income space, global aggregate bond index was flat but short duration credit was
mild positive. The 2s10s US treasury curve also steepened by approx. 15bps, partly
driven by changes in Japanese monetary policy as well as strong macro data.
Investor Newsletter
Finally, the crude and energy complex had a strong July with crude oil rising ~15% and
US energy equities also up >7% in price terms. This might be a result of demand
holding up better than investors originally expected, amidst a tight supply environment
anyway, for the last 1.5 years.
Portfolio Update
We continue to run underweights in both equities and duration, in line with our view that
we still see risks on the horizon for the global economic cycle and a sharp Fed pivot is
farther away this time. However, as we approach the end of the hiking cycle, we have
started to extend duration in the form of 7-10y treasuries. This helps bridge some of
our duration underweight and offers a low-cost recession hedge. Within equities, we
are comfortable with our equity underweight and will only add to equity risk at better
levels. In July, all our long equity and commodity positions contributed positively. While
fixed income returns were muted, they were still positive, with the exception of 7-10y
treasuries which were negative given the recent rise in long-end yields.
Our preliminary estimate suggests the portfolio to be up approx. 1.8-2.0%,
underperforming the benchmark by approx. 20bps. We still await numbers from the
alternatives sleeve which have delivered uncorrelated returns in the past. This would
bring our year-to-date performance to > 8.5%. The portfolio has exhibited strong alpha
since inception and our current positioning allows us to capture a meaningful portion of
the upside with stronger risk management. Given our cautious stance, we will
underperform on the upside during strong months and outperform the benchmark on
the downside but over a long time frame, we will likely continue to generate alpha.
Disclaimer: There are risks involved with investing in Equities, including possible loss of money. Investments focused in a particular sector, such
as technology, are subject to greater risk, and are more greatly impacted by market volatility, than more diversified investments. The materials and
data contained herein are provided to demonstrate how Kristal works and are provided for information only. None of the materials and data shall
be construed as: (i) an offer to sell securities; (ii) an offer to provide advice on securities. Kristal does not make any representation, undertaking,
warranty, guarantee, or other assurance as to the timeliness, completeness, correctness, reliability, or accuracy of the materials and data herein.
Kristal and its affiliates accept no liability or responsibility whatsoever for any direct or consequential loss and/or damages arising out of or in
relation to any use of opinions, forecasts, materials and data contained herein or otherwise arising in connection therewith.
