Fund Return 2023-2024

Returns to 31.05.2023

Please click here to see a graphical illustration of funds to 31.05.2023

Investment Commentary

Provided by Mercer - CERS Investment Adviser

Market Developments

In August, equities weakened after a strong run over the past few months. The US outperformed most major developed and emerging market countries, while growth generally outperformed value. Fixed income performance was flat to negative.

Negative equity performance appears to have been driven by an absence of positive news and markets being technically overbought after a few months of strong gains. Comments by Federal Reserve Chairman Powell stating that inflation remains uncomfortably high and the Fed is prepared to raise rates further if needed also contributed to the negative sentiment. Some negative headlines such as the Fitch downgrade of US government debt and Moody’s downgrading US regional banks did not lead to major market reactions. Telecommunications and energy were the only sectors with positive returns during the month.

Forward-looking composite purchasing manager indices (PMI) continued to fall. In the US, the composite PMI fell to a six-month low. Overseas, composite PMIs also declined for the UK, Eurozone and Australia. Japan was one of the only regions to see an increase in their PMI. Consumer confidence continues to weaken with growing signs of consumer distress, such as rising credit card and auto-loan delinquencies. Labor markets appear to be cooling off, but generally remain strong. Overall, this paints a picture of a slowing economy with some regions weaker than others, particularly China, UK, and Eurozone.

Headline inflation ticked up slightly in the US and dropped sharply in the UK and Eurozone, largely driven by base effects. Inflation remained unchanged in Japan and turned negative in China. Core inflation generally continued to soften for most regions. At the annual summit in Jackson Hole, central bankers expressed cautious optimism, while acknowledging that inflation remains elevated. Federal Reserve Chairman Powell suggested that the Fed intends to hold rates steady, but it is prepared to raise rates further if necessary. The Bank of England raised the bank rate for the 14th consecutive month to 5.25%, while China’s Central Bank introduced some easing measures.

In terms of geopolitics, talks over alternative export routes for Ukrainian grain made progress amid the ongoing conflict. At the BRICS Summit, invitations were extended to six nations to join the block. US dollar strengthened against all major currencies, most notably against the Australian dollar, South African rand and Japanese yen. Oil prices rose during the month and reached their highest levels for 2023. Wheat prices dropped sharply over the month as Russia increased its shipments after a better-than-expected harvest which offset the negative impact of renewed uncertainty over Ukrainian supplies. Global REITs declined during the month, modestly underperforming broader equity markets.

Outlook

Central banks in most parts of the world — with the notable exceptions of China and Japan — have been tightening monetary policy (using both higher interest rates and quantitative tightening) in an attempt to slow economic growth, ease wage growth and reduce inflation. However, the slowdown has only been modest thus far, with unemployment levels at their lowest in decades

The global economy’s resilience can be attributed to three main factors: a growth boost from China’s reopening, broad strength in consumer balance sheets and an assist from lower energy prices. We expect some of these supporting factors to fade, with a more difficult 12 months ahead for the US, even if China remains strong. However, we don’t expect uniformity across regions as different economies are at varying stages of the business cycle. When asked what keeps us awake at night, we would note the risks below.

Contagion from the US regional banking crisis

US regional bank distress still has the potential to spill over into larger banks and to banks outside the US, causing a broader credit crunch. However, we believe this scenario is unlikely due to the significantly improved capitalization of banks, robust bank profitability and the determination of policymakers to ensure the stability of the financial system, which is closely aligned with a stable banking sector.

Persistent inflation

Although we expect headline inflation to decrease significantly in the near term, it’s less clear if and when core inflation will fall sustainably to central banks’ 2% targets. A delay could force central banks to keep interest rates high for some time or even raise them again after a pause.

Geopolitics

A further deterioration in US–China relations may lead to additional trade restrictions and potential military confrontations, both direct and indirect, between the two global superpowers. A further escalation of the ongoing war in Ukraine remains a risk, with far-reaching impact politically, economically and, more importantly, in terms of the human cost.

Notes