The market continued its rally from the previous month as the global market’s performance was spurred by lower inflation numbers in developed markets including the Eurozone and U.S. The fund was up 1.5%, underperforming MSCI World which was up 3.4% for the same period. Performance in the fund was boosted by Meta, Alphabet and Idexx Laboratories which were up 11%, 10.9% and 10.3% respectively. For MSCI World, we saw Value (+3.9%) outperforming Growth (+2.9%).
Our macroeconomic heatmap, which guides are asset allocation in the fund, has been showing us that that the rate cycle in the U.S is nearing the peak of its rate hike cycle as inflationary pressures ease. Inflation has come off from its peak of 9% in June last year to 3% in June 2023; however, core inflation remains sticky at 4.8%. We’ve been surprised with the strength of the U.S. economy as the labour market has remained resilient in an environment of monetary tightening. The Chief recruiter of the U.S. employment marketplace, ZipRecruiter, stated that U.S. job openings are 40% higher than pre-Covid, while monthly layoffs are 21% lower than pre-pandemic levels. The Fed has also revised its unemployment projections, lowering them to 4.1% from the previous estimate of 4.5%. This indicates the strength of the U.S. job market, with the current unemployment rate at 3.5%, lower than what the Fed had anticipated. With a strong economy, this means the risk of recession is low in the near term and that there’s a chance of a soft-landing.
Since late last year, companies have been revising their outlook lower and there’s been earnings downgrades due to the expectation of inflation putting pressure on sales and margins of companies, as well as higher rates negatively impacting companies balance sheet. This bad news has been reflected in many of these companies over the past and current earning season, so from the third quarter we’re expecting to see a recovery in earnings and earnings beating due to easier comparisons’. As a result, we’ve been increasing our market exposure in the fund; at the start of the year our market exposure was 55% and now by the end of July we’re sitting at approximately 68%. We’ve remained overweight the front-end of the U.S. yield curve to take advantage of the inverted yield curve as we expect these rates to fall more than the longer term rates (a decline in yields mean an increase in bond prices).
We’ll remain data dependent and continue to monitor economic indicators as August marks the end of the second quarter earnings season and key economic data for August and September will influence policy stances.