VAM Managed Funds (Lux) Commentaries
October 2023 (click here to download)
VAM Fund
The US saw some mixed economic data in the past week which still hasn’t provided us with a much clearer picture of where the economy is headed. The latest data from the Bureau of Labour Statistics published at the end of the month shows that the jobs market continues to be strong, whereas the latest data from the Institute of Supply Management (ISM) shows some cooling of demand across several different sectors. While this doesn’t equate to a meaningful slowdown yet, it is important to be aware of it, especially during earnings season, and to see whether reported revenue and earnings are supporting this hypothesis. There are still a number of market commentators that are continuing to see the US avoiding a recession altogether with the much vaunted ‘Soft Landing” being the scenario for 2024.
Economic growth was very strong during Q3, and with inflation in the US remaining at around the 4% level, it is unlikely that we will see the Federal Reserve begin to cut rates any time soon, with the likelihood being another rate increase if we see jobs numbers remaining strong and inflation not falling faster towards the Fed’s 2% target. In fact, we would be surprised to see a rate cut before the second half of 2024 if the market remains as robust as we have seen it for much of this year. As mentioned in previous commentaries, the Fed is walking a tricky tightrope by attempting to cool what has been a very ‘hot’ economy, without crashing it into a damaging recession. Their caution around raising rates any further is understandable, but investors also need to see continued growth of corporate earnings in order to justify current equity valuations. The Manager continues to see money flow into mega-cap tech stocks, which after a period of some volatility resumed their strong upward trajectory towards the end of the month.
In contrast to the US, the European economic backdrop has been softening markedly, with business sentiment, especially in Germany, continuing to weaken and retail sales falling as unemployment rises. It seems that the ECB’s intervention has worked, and it is unlikely to raise rates further in the short term, but it is also unlikely to cut rates any time soon. It will take time for inflation to fall far enough that the ECB may become more dovish, but the pace of revenue contraction and earnings slowdown is faster than the US, so Europe may lead the way on the return to lower rates next year.
On the European periphery, the UK economy is showing signs of weakness which led the Bank of England (BoE) to maintain rates at its most recent meeting. Despite higher inflation than most other developed market economies, the BoE has been less hawkish than other Central Banks. Economic activity has deteriorated noticeably this year and with a Conservative government trying to curry favour in the run up to an election, they are widely forecast to lose, we could see tax cuts in the upcoming budget which would potentially lead to the risk of further inflation and the potential for stagflation, as higher rates impact economic growth and consumer spending.
The main geopolitical risk we see in Q4 seems no longer to be the war in Ukraine, but the escalation of the conflict in Gaza. The potential for this to spread across the region seems relatively contained at the moment, but as civilian casualties rise and the potential for a second front opening on the border of Lebanon, courtesy of the Iran backed Hezbollah, this could lead to more fallout. The potential for the Middle Eastern powerbrokers like Saudi Arabia, Qatar and the UAE more tightly controlling the oil supply is a concern, but this would depend on their view of the conflict and what they may be called on to do financially once Israel’s objectives have been achieved. Their dislike of Iran is well known and helping with rebuilding would be a good way to weaken its foothold in the region. This is a situation the Manager will monitor closely, with a focus on its market impact in the next few weeks. Iran have continued pulling the strings at arm’s length in the region, but have held off on becoming more deeply involved. Were this to change, we could see a dent to investor confidence, but the deterrent of a large US flotilla in the Mediterranean seems to be working.
The markets continue to look strong into year-end, and while the prospect of a recession is constantly in our minds, the reality of strong earnings and robust employment numbers means that the risk of that recession is continually being pushed further out. In fact, if the current strength continues, we may never see it at all. For this reason, the Manager remains positive on US and global equities.
VAM DISCRETIONARY FUNDS
VAM Cautious Fund
October was very much a continuation of the trends seen for the quarter just gone, with resilient economic data supporting the ‘higher for longer’ rates argument. Equities and bonds declined in unison as government bond yields continued to grind higher to levels not seen since 2007, while resurfacing geopolitical risks further weighed on sentiment. Commodities were the standout outperformer over the month as gold strengthened. Credit sensitive assets underperformed as evidenced by widening credit spreads for investment grade and high yield credit. The recent consolidation in markets brings equity valuations back into check, especially when considering the strong earnings growth being achieved, most notably in the US.
While many leading indicators point towards an economic slowdown, coincident data points from the US labour market jobs and GDP were suggestive that the economy remains remarkably resilient to the historic rise in the cost of capital. US inflation was also flat year-on-year in September against expectations of a slight moderation. Markets pushed back expectations for easing monetary policy in 2024, and this would partly explain the weaker month for risk assets. It is also important to highlight that there are technical factors also at play, with US fiscal measures contributing to a significant quantum of Treasury issuance in the coming months also playing a part in pushing yields higher. With the tightening of financial conditions that is playing out, it remains to be seen whether the fundamentals justify rates at their current levels.
VAM Balanced Fund
October was very much a continuation of the trends seen for the quarter just gone, with resilient economic data supporting the ‘higher for longer’ rates argument. Equities and bonds declined in unison as government bond yields continued to grind higher to levels not seen since 2007, while resurfacing geopolitical risks further weighed on sentiment. Commodities were the standout outperformer over the month as gold strengthened. Credit sensitive assets underperformed as evidenced by widening credit spreads for investment grade and high yield credit. The recent consolidation in markets brings equity valuations back into check, especially when considering the strong earnings growth being achieved, most notably in the US.
While many leading indicators point towards an economic slowdown, coincident data points from the US labour market jobs and GDP were suggestive that the economy remains remarkably resilient to the historic rise in the cost of capital. US inflation was also flat year-on-year in September against expectations of a slight moderation. Markets pushed back expectations for easing monetary policy in 2024, and this would partly explain the weaker month for risk assets. It is also important to highlight that there are technical factors also at play, with US fiscal measures contributing to a significant quantum of Treasury issuance in the coming months also playing a part in pushing yields higher. With the tightening of financial conditions that is playing out, it remains to be seen whether the fundamentals justify rates at their current levels.
VAM Growth Fund
October was very much a continuation of the trends seen for the quarter just gone, with resilient economic data supporting the ‘higher for longer’ rates argument. Equities and bonds declined in unison as government bond yields continued to grind higher to levels not seen since 2007, while resurfacing geopolitical risks further weighed on sentiment. Commodities were the standout outperformer over the month as gold strengthened. Credit sensitive assets underperformed as evidenced by widening credit spreads for investment grade and high yield credit. The recent consolidation in markets brings equity valuations back into check, especially when considering the strong earnings growth being achieved, most notably in the US.
While many leading indicators point towards an economic slowdown, coincident data points from the US labour market jobs and GDP were suggestive that the economy remains remarkably resilient to the historic rise in the cost of capital. US inflation was also flat year-on-year in September against expectations of a slight moderation. Markets pushed back expectations for easing monetary policy in 2024, and this would partly explain the weaker month for risk assets. It is also important to highlight that there are technical factors also at play, with US fiscal measures contributing to a significant quantum of Treasury issuance in the coming months also playing a part in pushing yields higher. With the tightening of financial conditions that is playing out, it remains to be seen whether the fundamentals justify rates at their current levels.
Sources: Rivers Capital Management and atomos.
atomos is the trading name of Atomos Investments Limited, which is authorised and regulated by the Financial Conduct Authority. Atomos Investments Limited is registered in England and Wales, No: 2041819. Registered office: 2nd Floor, 5 Hatfields (alto), London SE1 9PG.
South African Investors: This is a Section 65 approved fund under the Collective Investment Schemes Control Act 45, 2002 (CISCA). Boutique Collective Investments (RF) (Pty) Ltd is the South African Representative Office for this Fund. Boutique Collective Investments (RF) (Pty) Ltd is registered and approved under the Collective Investment Schemes Control Act (No.45 of 2002).
Disclaimer
VAM Fund, Cautious, Balanced and Growth Funds are compartments of VAM Managed Funds (Lux).
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