August 2022


The Good: Yield is Back in Town

The past year has been hard on investors. The market declines this year have been attributed to runaway inflation stoking concerns of expected steep interest rate hikes and more recently, the likelihood of an economic recession precipitated by these hikes. As we have mentioned previously, markets have historically digested these concerns and continued with its upward ascent. We have been recommending to our clients to remain invested and wait for the inevitable upturn – the exact catalyst and timing on this is anyone’s guess. In the meantime, it is our job to identify opportunities which heightened volatility tend to create.

Since markets began tumbling in the beginning of the year, the annual yield on US government bonds maturing in 2032 has risen by 1.3%. This modest increase has reduced the price of these bonds by a whopping 10% – so much for the perception that US government bonds don’t carry much risk. The graph below shows the yield that an investor expects to receive from US government bonds across maturities ranging from August 2022 to August 2052. Note the green bars which shows yields having risen dramatically over the past year, especially for bonds maturing in three years or less.

Source: Bloomberg

Inflation expectations are the major determinant in setting the yield that investors require from bonds. Interestingly, the average one- and three-year forward inflation expectations today remain largely unchanged relative to a year ago.

Source: Bloomberg

This means that either US government bonds have come down to a level where they are fairly priced, or an opportunity has presented itself. We believe it is the latter and have gained exposure to bonds in the Global Balanced Fund following years of omission. With all the talk of an impending recession, we feel inflation could miss on the downside over the coming years providing the potential for short-term capital returns on these bonds due to their price sensitivity to interest rates. Under the worst-case scenario, by holding the bonds to maturity, a return of 2.5% p.a. is far better than holding USD cash yielding very little and it will balance the return profile of the fund.

If yielding investments appeal to you, we have just launched two products designed to take advantage of these opportunities. One of them offers leverage to exploit the positive spread between the yield received on moderate-risk investments relative to the low rates on funding. Currently the spread is at attractive levels well above 3%. Feel free to contact us should you be interested in finding out more.

The Bad: It’s Always Before The Dawn


The Bank of America Fund Manager Survey, released in the middle of July, revealed an exceptionally bearish stance from global money managers. Allocations to cash increased to levels not seen since 2001 while exposure to equities fell to levels not seen since 2008. 58% of survey participants stated that they are taking lower than normal risks, a record that surpassed levels seen during the Global Financial Crisis of 2008. Selling pressure emanating from these bearish viewpoints has caused significant losses for the year in capital markets with major indices such as the S&P 500 being down more than 15% year-to-date. In recent months, concerns of a potential recession have emerged, with the survey indicating that nearly as high a percentage of managers are predicting recession as was the case in April 2020 and March 2009

Source: Bloomberg

Interestingly, both these periods turned out to be attractive entry points into the market. In the 12 months following March 2009 and April 2020, the S&P 500 increased by 46.6% and 46.1% respectively. Has the market bottomed? Perhaps not quite yet, but it is often in times of crises where the greatest opportunity looms. As Warren Buffett famously said, “A simple rule dictates my buying: Be fearful when others are greedy and greedy when others are fearful.”

The X: Out With The Old, In With The New

Source: Shopivo

The past week has highlighted the ongoing retail battle as the earnings results of E-commerce players largely trumped that of traditional Brick-and-Mortar outlets. According to the US Department of Commerce Retail Indicator Division, traditional retailers still rake the lion share of US commerce, with $6.6 trillion in reported sales during 2021 and E-commerce sales coming in at $870 billion. Nevertheless, the E-commerce narrative remains compelling. Following their results, Amazon and Shopify surged 10% and 12% respectively, as they guided for continued margin expansion while Walmart slashed their profit outlook, sending the share tumbling by 10%. The majority of the E-commerce business model centres around facilitating transactions and taking a cut of the revenues (“Gross Merchandise Value”), whereas physical retailers need to try and pass on inflationary costs to consumers which is never an easy task. This means that as long as the E-commerce players manage their internal costs, inflation should have minimal impact on their margins.

Although we would expect inflation to impact consumer spending at large, due to the low-to-middle income consumer demographic and the nature of the products being sold, the E-commerce business model thrives during periods of extreme inflation. Further, with E-commerce penetration sitting at only 13%, there remains significant runway for these business models to continue gaining market share.

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