The U.S. equity market had a tough month with the S&P 500 having its worst monthly performance since March 2020, when the pandemic hit us. The CBOE Volatility Index (VIX)- which measures the stock market’s expectation of volatility- increased from 16.1 at the start of the month and peaked at 25.7 by mid-month then slightly retreated to 23.1 at the end of the month. As a result, a sell-off incurred as investors were concerned about factors which could negatively impact the global economic recovery. Value outperformed growth this month with the MSCI World Value Index at -3%, while MSCI World Growth Index was at -5.2%. This was spurred by yields rising. Overall, the MSCI World index was down 4.1% for the month.

One topic which has been the front and center of headlines recently is the United States debt ceiling. The U.S. debt level is currently at $28.4trn with a debt to GDP ratio of 125.9%; while their tax revenue is at $3.9trn. Janet Yellen, the U.S. Treasury Secretary, stated that the U.S. government could default on their upcoming debt obligations if the limit on federal debt is not increased by around 18 October- that’s when the government is expected to run out of cash. So, volatility in the market can be expected as the deadline looms as to whether the Democrats and Republicans act on increasing the borrowing limit to allow for debt repayments, which Moody’s has warned could cause a 4% decline in economic activity if default occurs. A downgrade on their credit rating is possible if this continues and we’ve already seen 1-month T-bills having higher yields than 3-months because of this potential default. In Asia, eyes have been on the Evergrande crises which has serious repercussions for the Chinese real estate market; it is also still not clear as to whether China will save the company with the funds needed for interest payments on their $300bn debt.

In a statement, the People’s Bank of China committed to ensure “healthy property market”.

Energy companies have benefitted from price increases as energy prices are being spurred on by factors on the demand and supply side. Natural gas recorded a gain of 34% for the month and WTI crude was up 14.1%. For the first time in three years, brent crude jumped to $80 per barrel as price increases were fueled by the global economy easing lockdown restrictions as more people get vaccinated. As for natural gas, the price increase is due to gas shortages globally, increased demand from Asia as they recover from the pandemic and moderate gas supplies from Russia; this has resulted in an incentive to burn coal instead of gas. Due to the price surge, electricity prices in the U.S. and Europe have increased too, contributing to the inflation increase in the U.S.

We can continue to expect volatility during October as bond yields will continue to be affected by U.S. fiscal disputes and increase in natural gas prices amongst other things. For the short-term, we’re still cautious about China given potential for more regulatory uncertainty. The fund will continue to investment in quality companies within our investment themes and this will be complemented by stocks which will benefit from the global recovering.